A mortgage refinance can make sense if you want to shorten your loan term, tap into your equity or take advantage of better terms like switching to a conventional loan to get rid of FHA mortgage insurance.
But with fluctuating rates, refinancing isn’t always an easy decision, especially if you’re already locked into a low rate. Taking out a new mortgage now might mean higher borrowing costs, so does that mean it’s better to wait for rates to drop?
There’s no one-size-fits-all answer, but considering a few key factors can help you decide if refinancing is the right move for you.
Risks of Waiting
Waiting for lower rates could mean paying unnecessary costs for longer than you need to. Mortgage rates may never drop low enough to match your current rate, and in the meantime, you could be stuck with expenses that refinancing could eliminate.
For example, if you have more than 20% equity in your home, you might be able to refinance out of an FHA loan and remove mortgage insurance. Even if the new loan has a higher interest rate, your overall monthly payment could still be lower. For instance, if you’re paying $200 a month for mortgage insurance, but refinancing saves you $150 on your monthly payment even with a higher rate, that’s still a net savings of $50 per month.
Another risk of waiting is missing out on the equity you’ve built. If you need cash now (for home improvements, debt consolidation or other expenses) holding out for a lower rate could mean delaying necessary projects or financial relief.
Cost of Inaction
Additionally, holding out for lower interest rates can be a gamble. If rates move in the opposite direction, you could end up with a worse deal than what’s available today.
Even a small rate increase can significantly impact your monthly payment and the total interest you pay over the life of the loan. Therefore, if refinancing is on your radar, waiting too long could mean missing the best opportunity to secure a manageable rate.
Beyond interest rates, there are other hidden costs of inaction. For example, if you plan to stay in your home long-term, refinancing now could help you start building equity faster, especially if your current loan has less favorable terms. Additionally, the cost of homeownership itself tends to rise. Property taxes, homeowners insurance and maintenance expenses can all increase over time.
If you’re relying on a refinance to lower your costs or free up cash flow, postponing the decision could mean dealing with higher overall expenses down the road.
How to Be Ready When the Time Comes
Whether you decide to refinance now or wait for lower mortgage rates, it’s important to be prepared so you can act quickly when the time comes.
Refinancing means replacing your current mortgage with a new one, which requires going through the application, approval and underwriting process either with your current lender or a new one. It’s important to have documents ready to go.
In most cases, you’ll need to provide the same documentation as when you first got your loan, including W-2s or tax returns (if self-employed), bank statements and proof of income. You’ll also need to meet the minimum credit requirements for the loan program you’re applying for.
To improve your chances of approval and secure the best possible terms, check your credit report for errors and work on strengthening your score. This means paying bills on time, reducing credit card debt and avoiding unnecessary credit inquiries.
Also, be aware that refinancing typically involves closing costs, which usually range from 2% to 5% of the loan amount. Some lenders allow you to roll these costs into your mortgage to avoid an upfront payment, but this will increase your loan balance.
If you have any questions about refinancing or need advice on how to get started, contact the loan experts at FirstBank Mortgage. We can discuss your options and help you decide whether now’s the right time to refinance.
