Some events should cause you to consider a mortgage refinance. These 5 occurrences should prompt you to check mortgage rates and see how much you could save.
1. Your property value has increased
Ordinarily, property values increase over time--experts estimate that this increase averages 4% to 5% per year. In addition, over time, mortgage balances are paid down and home equity grows. All things being equal, the greater your home equity, the less your mortgage costs. The figures below show what happens as home equity increases for borrowers with credit scores of 680-699:
Mortgage rates increase as the loan-to-value (LTV) does until you get to over 95%, when FHA mortgages cause average rates to drop slightly. So if your home equity has increased by at least 5%, you owe it to yourself to see if you qualify for lower mortgage rates.
2. Your credit score has improved
Similarly, better credit scores mean lower mortgage rates. If your scores have improved, you may be able to improve your home loan. Typically, paying your bills on time for a year or so and paying down your balances to improve your credit utilization ratio are the most effective ways of improving a mediocre credit score. Here's how mortgage rates drop as credit scores improve for an 80% mortgage:
So after paying your bills on time and paying down your balances, check your credit at annualcreditreport.com and get your free credit scores. If you've moved up a tier or two, ask a few lenders what mortgage refinance rates you'd qualify for.
3. The economy has worsened
When the economy heats up, inflation becomes a concern, and interest rates (including mortgage rates) rise. But when the economy is doing poorly, inflation is not a factor, and interest rates drop. If your mortgage was taken out in happier financial times, there may be an opportunity for you to capitalize on the country's economic troubles and secure a lower mortgage rate for your home. So, if you're watching the financial news and it's bad, bad, bad, check mortgage rates--they might be good, good, good.
4. Your income has increased
If you have more disposible income--either because you received a significant raise or because a big expense (like your kid's college tuition) went away, you may be able to refinance to a 15-year mortgage and save a lot of money.
First, by paying off your mortgage faster, you can reduce your interest expense by thousands, maybe even hundreds of thousands of dollars. Second, rates on 15-year mortgages are about half a percent lower than those on 30-year mortgages. The reason rates are lower for 15-year mortgages is that they are less risky for lenders. That, however, means they are more risky for you, so make sure your emergency accounts are fully-funded and that you'll be able to continue investing into your retirement accounts before opting for a shorter mortgage term.
5. Your plans have changed
Maybe you planned to live in the same home in the same town forever but are rethinking your future. People move to take jobs, they marry, divorce, have kids, adopt 101 dalmatians, whatever. If your tenure in your home is looking shorter than you originally planned, you might be able to save some money by replacing a 30-year loan with a hybrid ARM fixed for 3, 5, 7, or 10 years. Rates for 3/1 ARMs can be as much as 1.5% lower than 30-year mortgage rates and run about one percent lower for 5/1 ARMs. Depending on the size of your mortgage, over five years, you could save enough to buy your next car with cash.
Nothing stays the same for very long these days--if the economy, your goals, or your life changes, sometimes your mortgage should change as well.