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Riding the Waves of Interest Rates
Interest rates fluctuate year to year, influenced by factors such as inflation, economic growth, the Fed’s monetary policy, and the state of the bond and housing markets. Interest rates are the amount a lender charges a borrower on top of the principal for the use of assets. From March 2022 to July 2023, there have been significant interest rate hikes. The Federal Funds rate stands at 5.25% to 5.50%.
America’s current economy has painfully high-interest rates, with the average household income remaining stagnant while rent prices across the nation are increasing. Many homeowners are asking, is refinancing a sensible move in this climate? Or should I wait until interest rates decrease?
In this article, we will discuss the factors to consider when determining whether or not to refinance in today’s economy.
Understanding the Basics: How Refinancing Works
First, we must define what exactly refinancing is, and what to know before making such an important life decision.
When you are at the point in life where you want to buy a home, and are looking for monetary support in the process, a bank can decide to loan you a certain amount of money. This is what is known as a mortgage loan – a loan that is used to buy a home or to borrow money against the value of a home you already own.
A mortgage is an agreement between you and a lender that gives the lender the right to take your property if you fail to repay the money you’ve borrowed plus interest. Refinancing is the process of getting a new mortgage to replace the one you received when you initially bought your house.
Interest rates are essentially an added cost on top of the total amount of money borrowed from a lender. When you refinance your home, the goal is to get a lower interest rate than what you currently have, so that you have to pay less money back over a set period of time which can save you money in the long run.
Now, let’s go over some of the basic concepts associated with refinancing.
Loan term
The loan term is the period in which you decide with the bank or lender that it will take you to repay the mortgage on your home. The most common terms are 15, 20, or 30 years. Refinancing allows you to change your loan term and if there are good interest rates at the time of refinancing, you can have the ability to positively impact your monthly mortgage payments.
Equity
Your home equity is the portion of ownership that you have in your home. This is determined by how much of your home you own and have paid off, versus how much you have left to pay back on your mortgage.
Cash-Out Refinance
Cash-out refinancing allows you to borrow more money on top of the money that you currently have borrowed from your lender. This lump sum of money can be taken out as cash, hence the coined term cash-out refinance. This money can then be invested back into your house through home improvements, debt consolidation, or other improvements.
Closing Costs
Refinancing involves closing costs, which are fees that are associated with finalizing a new mortgage which can include application fees, appraisal fees, title insurance, and more. This is one of the most important things to consider when determining if you want to refinance your home.
Appraisal
An appraisal is an assessment of your home’s current market value, which takes into account your home’s location, the current state of the market, and the current condition of your home.
Loan-to-Value (LTV) Ratio
The LTV Ratio is the percentage of your home’s value that the new mortgage represents. The lower your LTV ratio is, the lower the interest rate you will receive.
Credit Score
A higher score often results in better loan terms. Your credit score is something that you have the opportunity to build over a long period of time.
Refinancing in a High-Interest Environment
Now that we had a quick refresher on refinancing, let’s look into the results of refinancing during a high-interest environment.
Lowering Monthly Payments
Market conditions are constantly changing. Even in a high-interest rate environment, it may be possible to find a new mortgage with a lower interest rate, if you happen to find a lender who is open to offering competitive rates. But, you will find that it still may be best to wait out high-interest rates, since the rate of reduction may not be as significant as it would be in a lower interest rate environment.
Long-Term Savings
If you find a lender who is willing to offer you competitive rates, you may find that you will save money in the long term by playing the long game. By spreading the payment over a longer period of time, each monthly installment will be more affordable.
Potential Drawbacks
Closing costs and fees: As we discussed earlier in this article, closing costs are one of the most important things to consider when determining if you want to refinance your home. These are the fees that are associated with finalizing a new mortgage, and in a high-interest-rate environment, it is crucial to evaluate a cost-benefit analysis on how much you are willing to pay upfront in comparison to how much you intend to pay each month.
Locking in Rates: Market rates fluctuate unpredictably, and committing to a mortgage locks you into a set rate for a specific period of time. This potential drawback can be good or bad based on what your preferences are, but this is just one of the risks associated with committing in a high-interest market.
Strategic Considerations: Making Informed Decisions
There are various approaches you may take in order to make informed decisions when refinancing your home during a time of high interest rates.
First, you must evaluate your current financial situation, and your future financial goals, and clearly define what you are trying to achieve with refinancing.
It is important to know that timing is everything in a constantly fluctuating market. Taking informed risks is the only way to seize optimal market conditions. Next, we will discuss a couple of ways that you may mitigate potential drawbacks for high-interest rate market conditions.
Conducting a break-even analysis allows you to take into account the personal factors that go into the decision to refinance, as you will be determining how long it will take for you to offset the upfront costs in relation to the savings you intend to keep each month.
Some lenders offer what is called a float-down option, which allows you to secure a lower rate if market conditions improve before closing in on your refinance rate. This allows you to have a greater time margin before your rate lock period closes.
Lastly, we recommend negotiating as some lenders are willing to compromise. Not only should you try to negotiate with your lender, but you should also shop around for the best possible rate that you can afford with your current financial situation.
Navigating the Application Process with Select Home Loans
Select Home Loans understands that finding the right mortgage is more than locking in the best rate you can afford. We are here to help you and stay by your side through the whole process, being your advocate connecting you with our wide network of expert professionals, and helping you make your final decision with total confidence.
Our mission is to streamline operations and simplify the home loan process to help you get your mortgage closed promptly. Our customer-centric approach allows for the development of strong relationships with clear and timely communication. We provide progress updates to keep you informed on opportunities and negotiations with sufficient time to consider.
With Select Home Loans, we are committed to serving you beyond the mortgage approval process. Our team is always willing and able to take the time to educate you with free, extensive consultations. Please feel free to reach out to one of our experts or fill out a form here and we will be happy to be of assistance.
