Unlock Savings: 4 Borrower Types Who Should Refinance Their Mortgages!

As mortgage rates continue to fluctuate, homeowners face a tough reality: refinancing their mortgage loans isn’t as straightforward as it used to be. With average mortgage interest rates hovering between 6.08% and 7.79% throughout 2023 and into 2024, many are hesitant to let go of their existing loans for fear of higher monthly payments.

But wait! The landscape is shifting. While current mortgage rates are higher than those we saw during the pandemic, they’re also lower than their recent peaks. “This presents a unique opportunity for various kinds of borrowers to save money,” says a leading industry expert.

So, who stands to benefit most from refinancing in today’s market? Let’s break it down!

4 Types of Borrowers Who Should Refinance Now

If you find yourself in any of the following categories, experts suggest you explore refinancing options:

1. Homeowners with Adjustable-Rate Mortgages Nearing Adjustment

If you took out a 5/1 adjustable-rate mortgage (ARM) and your adjustment period is approaching, now is the time to consider switching to a fixed-rate mortgage. According to industry insiders, this is especially beneficial if your credit score or financial situation has improved over the past five years. “With ARM rates in late 2019 averaging around 3.4%, today’s adjustments could see increases of more than three percentage points!”

Locking in a fixed rate now can help you dodge those drastic hikes and keep your monthly payments steady.

2. Recent Buyers with Rates Above 7%

Have you secured a mortgage rate above 7% in the last couple of years? It’s time to take another look at refinancing. “You could save a significant amount on interest and monthly payments—potentially hundreds of dollars,” says a seasoned loan officer.

Experts recommend searching for a rate at least 0.5% to 1% lower than your current one. Just be sure to factor in closing costs to ensure the savings outweigh any upfront expenses.

3. Homeowners Eager to Eliminate PMI

If you’re paying private mortgage insurance (PMI) and have built up some equity, refinancing might allow you to eliminate this extra cost. “Removing PMI can lead to significant long-term savings, even if you end up with a slightly higher interest rate,” says a financial expert. If your home has appreciated in value or you’ve made consistent payments, this could be a golden opportunity.

4. Those Considering a Cash-Out Refinance for High-Interest Debt

If you’re juggling high-interest debt like credit cards or personal loans, a cash-out refinance could be your ticket to financial relief. “This strategy allows you to tap into your home equity to consolidate debts into one lower-interest mortgage payment, which can free up room in your budget,” experts note.

Key Considerations Before Refinancing

Before you dive into refinancing, keep these critical factors in mind:

• Break-Even Point: Assess how long it will take to recover closing costs through monthly savings. Aim for a break-even period of two to three years.
• Closing Costs: Expect to pay between 2% to 5% of your loan amount to close on a refinance. Weigh these costs against your potential monthly savings.
• Length of Stay: If you plan to move soon, refinancing may not be worth it. Stay long enough to recoup your costs.
• Current Loan Status: If you’re in the latter half of your mortgage, you may have already paid most of the interest, making refinancing less beneficial.
• Rate Difference: Look for savings of 0.75% or more to justify refinancing costs.
• Future Rate Changes: You can typically refinance again after six months if rates drop significantly!

The Bottom Line

Before jumping into a mortgage refinance, take a hard look at your current loan and future financial goals. Different refinancing options serve various needs and come with unique trade-offs. Consulting a mortgage professional can give you valuable insights into current rates and help you navigate your options.

When you meet with a loan officer, don’t forget to ask for a cost and savings analysis. “A good loan officer will keep an eye on rates for you,” experts advise. If refinancing isn’t the right move today, they can alert you when better opportunities come knocking.