Have you been watching as your friends and neighbors refinance their homes and trying to decide if it's time for you to join the party?
Maybe you're unsure if you have enough equity in your home, or if your credit is good enough, or if mortgage interest rates will go even lower than their current historic lows.
But how do you know if it's the right time to replace your current mortgage with a new one, preferably with better terms so you save money?
Here's one answer: "If you qualify for a loan that will lower your rate by three-quarters of a percent or more, and you'll be in your home for another one or two years minimum, this is probably the time to refinance," says Chris L. Boulter, president of Val-Chris Investments, Inc., a California company specializing in residential and commercial loans.
Good advice, right? Well here are a few more reasons you might want to consider refinancing your mortgage now.
Reason #1: You Want to Score a Record-Low Interest Rate
Have you been sitting on the fence waiting for interest rates to bottom out before you refinance your home? Well, you may want to think about jumping onto the refinance side now. Why?
For one thing, interest rates might not go much lower.
Consider the fact that a 30-year fixed rate loan was at 3.63 percent as of August 10, 2012, according to Mortgage News Daily, an organization that provides housing news and analysis. Could it go lower? Sure, but it's very unlikely.
"Interest rates are at record lows and they're not going to go any lower," says Boulter.
Plus, he believes that after November's presidential election, interest rates will likely creep a little higher.
Reason #2: You Have a Good Credit Score
Do you pay your credit card bills on time? Have you kept up with your mortgage payments? If so, you might have a good credit score - something that could qualify you to refinance and get those oh-so-low rates you've been reading about.
"A good credit score is very important when it comes to refinancing," says Boulter.
In fact, he says, in order to qualify for the historically low rates available today, on the scale that most lenders use you'll need a credit score of 720 or above, with some demanding 740 or above. This is on a scale of 300 to 850, the higher the better, according to the Fair Isaac (FICO) credit score website, which is the score lenders use most, according to Boulter.
And if you're wondering just how your score is calculated, there are a variety of factors, according to FICO's website. But more than half of your score (65 percent to be exact) will be determined by your payment history and the amounts you still owe.
And remember if your credit isn't great yet, but you still want to refinance, it is important to keep paying on time and to try not to accumulate too much debt.
Reason #3: You Want to Pay Off Your Mortgage Sooner
Don't want to wait 30 years to own your home outright? Well, thanks to the historically low rates, refinancing to a 15-year loan might be a way for you to change that.
If you have other investments that are conservative in nature - that is, they are paying very little interest to you - it could make better financial sense to pay off your mortgage sooner.
According to Boulter, here's a good rule of thumb: If the interest gained in an investment is lower than the interest you would pay on a new loan, then it might be wise to pursue the new loan.
Another good reason to refinance to a 15-year loan: If you have other investments that are not performing well, it could be wise to put that money toward the monthly payment of a shorter-term loan.
"In that sense, a lot of people are looking to pay off their mortgage debt rather than let their money sit in an investment that's not comparable to what it used to be," Boulter adds.
Reason #4: You Have Good Equity in Your Home
Equity is the difference between the current market value of your home and the amount you still owe on your mortgage. And if your equity is 20 percent or above of the market value, and you meet other standards like good credit, now might be a good time to refinance and grab some of those lower rates.
But why is 20 percent the magic number? Risk, says Boulter, and mortgage lenders' newfound aversion to it.
"Most banks have significantly tightened up their underwriting policies, and because of that very few will exceed 80 percent of a property's value in the loan," says Boulter.
This means that lenders will require a current appraisal of your property and will not loan you more than 80 percent of that worth. If that's enough to pay off your existing loan, then refinancing may make sense, according to Boulter.
If you do not have 20 percent equity, you could still qualify for refinancing, but you shouldn't expect to get the lowest interest rate, says Boulter. It could still make sense, however, since rates are so low. But it all depends on your current rate.
Reason #5: You're Staying Put
Do you love your home? Is it the one in which you plan to grow old with your significant other? If so, refinancing could make sense because it may take a while for the savings to pay for the cost of refinancing.
Yes, refinancing costs money. Typically, says Boulter, you should plan on paying closing costs anywhere from half to one percent of the amount you're borrowing. Then there is a loan origination fee, which could be another one percent.
"So you have to look at what it is going to cost you for that loan and how much you're going to save," says Boulter. "Then make a decision of how many more months you anticipate being in your residence to determine whether or not the expense justifies the savings."
To help you see the costs, most lenders will give you what's called a good faith estimate before you make any commitment, he says. That way, you have more details to make the right call.
- interest rates
- Credit Score