Last updated on January 10th, 2022 at 04:18 pm

Interest rates are very low at the time of this writing, (January 2022). Mortgage interest rates will go up in 2022 so the time to refinance is now to refinance your home. That assumes you want or need to refinance. Don’t let these low rates slip by.

With many changes brought about from the national election including massive spending, mortgage interest rates will no doubt be affected. Should you refinance now is a question that many people are asking. The answer depends upon several things but generally if you can save money you should.

Start by comparing the interest rate on your property with the current rate for the type of property you own e.g. single-family principal home. There is a general rule if there is a 2% difference you may save when all costs are considered. Perform the calculations to be sure.

Two basic components

There are two basic components to consider. First is the annual percentage rate and the second is the cost to refinance. Nothing is free, you may pay a few thousand dollars in “closing” costs. There is a lender fee to process and “points” as well. Usually, all of these costs are added to your loan so your refinance is painless.

A very good reason to refinance is to remove private mortgage insurance. If you have 25% equity (may be possible with 20%) you can refinance and the PMI will be dropped. This may be reason enough to refinance if the spread between your existing rate and the new rate is less than 2%.

Determine how much you will save

To determine how much you can save by refinancing, Use this link to a calculator REFINANCE CALCULATOR. Refinancing costs will vary based upon your credit, the property, and the amount you are borrowing. There will be a check on your credit report which is not important if you get the loan.

Interest rates at the time of this writing were hovering in the 3% range for a typical 30-year mortgage with 20% down and no PMI. Rates are near historic lows. A family member recently closed a refinance loan at 2.875% with all costs rolled in. Rates for some have been as low as 2.5% but as I mentioned above, they are trending up although as of this writing at a very low pace.

Consequences of refinancing

What are the consequences of going through the refinance process?

  • Your loan could be denied
  • Your credit report will take a temporary hit as an inquiry
  • If you are married or have others on the title of the house, they must agree to the refinance.
  • Public record. After the refinance this information will become public record.
  • Extends the period you will be paying on the home
  • Refinance costs are added to the loan

Benefits of refinancing

Here are some positives for refinancing:

  • Lower your monthly payment
  • Lower the amount you will ultimately pay in interest
  • Terminate PMI
  • Eliminate variable rate loan if you want to stay for a long time
  • Build equity faster
  • Lower your debt to income ratio
  • Permit you to invest the savings at a higher rate of return than the cost of the mortgage
  • Refinancing keeps your tax-deductible status whereas a second mortgage is not deductible.

There are a few ways that a refinance can be managed. There are straight refinances where you receive a lower interest rate and lower mortgage payment. A cash-out refinance is when you have equity in the property and you remove some of the equity during the refinance process.

Cash-out refinance

for example, you owe $200,000 on your home but it’s worth $300,000. To complete a cash-out refinance you will need to retain 20% equity in the home. The amount financed would be $224,000. This includes what you own and $24,000 in equity. Because the new lender is paying off the existing $200,000 loan, they will deduct the 20% equity and give you the remainder.

In this example, the remainder is $76,000. This cash out is yours to do what you want with. I never recommend that you do a cash-out refinance without a clear plan on how to invest the amount you are taking out. If, for example, you said that the $76,000 would be used to buy a rental property, I may agree that this use of the funds makes sense. Consider buying a second home.

Invest cash-out funds

You may want to invest the excess funds in the stock market or money market fund. You need to earn at least the interest rate you are paying to obtain it plus something for inflation. If you are paying 3.5% on your mortgage, you should look for a return of at least 5% if not more.

There is a point where you can take funds out without increasing the monthly payment above what it is now. If your current payment before the refinance is for example $1,000, you may see a reduction in your payment with a refinance to say $800.00 without taking cash out.

If you remove $50,000, it may increase your payment from the lower amount to about what you are paying after the refinance.

Better now than later

Regardless of your ultimate decision, you should give refinancing your property due consideration now rather than later. The time to refinance is now. No one knows when interest rates will increase but they will eventually. Do some planning before you apply. Check your credit score for free from many credit card providers and banks. Clean it up if necessary first.

Contact a loan broker rather than a bank or credit union if you have any issues with credit or a score of less than 740. Loan brokers can find the right loan for you from their large portfolio of lenders. If you have very good credit, you can go to a bank or credit union but a loan broker may be best there as well.

Most of my articles on this site are based somewhat on my own experiences. I like to try something before I write about it. Like trying using a new iPhone first, it makes sense to me. There are many bloggers out there who do not experience what they write about. So here is my experience with a recent refinance of my principal home.

Its good to have a relationship with a financial institution

It’s good to have, a relationship with various people who can help you when the time is right. Specifically, professionals. Brian, our Strategic Partner is the person I refer people to for all things mortgage-related. It’s ironic, I started calling clients, friends, and relatives when interest rates were on the floor (they are still are).

A number of them refinanced with Brian. All saved money considering the cost to refinance and the lower interest rate. I always tell them to consider the cost and how long they will stay in the home, just as I mentioned above.

Time to do what I say

When I was a teenager, I worked for a retail drug store dipping ice cream for customers. At the end of the shift, I needed a bath. I had ice cream everywhere. Mom would ask if I wanted ice cream after dinner and I told her no. I could not eat ice cream for a long time.

The reason for this story is that while I was busy telling everyone else to refinance, I neglected to work the numbers for myself. My excuse was that my rate was already low and that I would not usually save enough to make it work. Well, in this case, it made sense to refinance.

Brian was able to find a 2.75% interest rate for me with almost nothing in costs. I saved a full point and a few hundred dollars each month. I would recover the costs in a bit over one year. My credit score was very high and that was a major factor for this great rate.

First, I could save dollars and second, I could write about it

My decision to refinance was two-fold. First, I could save a few dollars, and second, I could write about it and work it into my upcoming course on investing in residential rental property.

Interest rates have been in late 2021 moving up and down in a range of about 1%. They are at near historic lows and can not remain there indefinitely. Interest rates have been as high as 17% in years past when there was high inflation. If you are going to do it, then the time to refinance is now.

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Please visit our Real Estate website for more articles about buying and financing homes Logan-Anderson, Gulf Coastal Realtors. We can also provide you with contacts of loan brokers who can assist you in refinancing your home.