Interest rates for both traditional and cash out refinance mortgages are on the rise in 2018, with rates for firsts around 4.5%. The higher rates that have been coming due to better economic indicators and Federal Reserve rate increase hikes, have put a bit of a damper on refinances for the past few months.
What is the outlook for cash out refinances? Is it a thing of the past, or will people still do refinances in the coming years? Below is more information to consider to help you make your home refinancing decision.
Overview of Home Refinancing Loans
Refinancing your first mortgage can be a good idea if you can save interest and lower your rate. Refinancing with cash out may be a smart move if you can save on your rate and also pull out cash for things that you need. According to financial experts, you may want to consider a refinance in 2018 in these situations:
- You can get rid of PMI: With a conventional loan, you are required to pay PMI until you have reached 20% equity. One of the most popular refinance products is the no PMI mortgage, because borrowers can get rid of the PMI payment monthly. Homes have been appreciating nicely in 2018 with 7% increases overall according to some surveys across the country. You could find yourself with more equity than you thought you would. If so and you are near 20% equity, refinancing to get rid of mortgage insurance can be a good idea. If you have an FHA-insured mortgage and are nearly 20% equity, consider a refinance into a conventional loan to escape mortgage insurance; you generally must pay mortgage insurance on FHA loans for life.
- You can go from an ARM to a fixed rate mortgage: If you have an adjustable rate mortgage, you may want to go into a fixed rate loan with your refinance. This will provide you with more stability over time as far as your payment. But rates have gone higher since 2017, so you could find the rate is going to be higher with a fixed mortgage. Consider a 15 year fixed rate mortgage to score a lower rate, if you can handle the higher payment.
- You are able to cut your rate by 1%. Many experts say it is worth refinancing if you can reduce your rate by 1%. Remember that every new loan you do incurs thousands in closing costs, so you really do not want to refinance your loan unless you can save a lot on the interest rate.
If you are in the following situations, you may not want to refinance right now:
- There is too little difference between your current rate and new rate. Rates on first mortgages are 4.5% or higher right now. If you have a rate that is close to that, you will probably not want to refinance. You also should resist the temptation to refinance anyway and pull out cash. The major reason to refinance should always be to get a lower interest rate.
- You want to pay off old debts. Some people like to pull out cash with a refinance to pay off debt. But you are transferring your unsecured debt to a debt secured by your home. If you fail to pay your mortgage, you could end up losing your home. Many people argue the only reason to pull out equity with a refinance is to do something that will pay you back, such as renovating the home or paying for college tuition. Buying investment property is another possibility.
- The breakeven point is not in your favor: If the rate is not low enough, you may not end up saving enough money to outweigh the cost of refinancing. If your refinance saves you $100 per month and the refinance cost $4000, you have to pay more than four years to make the deal break even.
- You have a small amount of home loan left to pay: If you only have a few years left on your mortgage, you may find there is little financial benefit to refinance now. You could get a lower monthly payment, but you will pay thousands in closing costs and fees.
The bottom line on home mortgage refinancing in 2018, especially when taking cash out, is to tread carefully. Rates are higher now and you may have a harder time saving money with a refinance after you account for closing costs. Another possibility is to consider a second mortgage instead of replacing the first mortgage. Your second mortgage rate could be in the 6% range, and that would allow you to access some of that built up equity at a still low interest rate.
It appears we are in a long term rising interest rate market, so for now, we expect to see fewer people taking advantage of refinances as the cost of borrowing money gets more expensive for the foreseeable future.