Is It A Good Time To Refinance?


The Threat of Rising Interest Rates

The Federal Reserve keeps hinting about the possibility of raising the interest rates.  The only reason they haven’t raise the interest rates yet is because of the release of new concerning the economy.  Job growth is slower than expected and the economic outlook is still uncertain.  Raising interest rates could harm an already fragile economy.  Additionally, the Feds have historically avoided raising interest rates preceding an election. We can probably predict the Federal Reserve will not raise interest rates until after the November elections.

Is It a Good Time to Refinance Now?

The most difficult issue when thinking about refinancing your current home loan is timing. Is it a good time to refinance? Timing is the biggest factor because if the time is right, interest rates will be lower than your current rate.  This will put you in a favorable equity position. So why would one refinance their home? The best result of a refinance would be to get a lower payment.  Additionally, reap the rewards of removing private mortgage insurance, and possibly cashing out.  A lower interest rate equals a lower amount of interest paid over time.

Case Scenarios:

#1 You have a 30 year fixed rate mortgage with an interest rate of 7.5%. Let’s use an arbitrary number and say you can get a refinance rate of 4%. Additionally, with the same terms fixed rate at 4% over 30 years. This is a difference of 3.5%. This would result in a significantly lower mortgage payment. It would be beneficial to refinance, especially if it doesn’t cost you any money to do it.

#2 You are in a 30 year fixed rate mortgage with an interest rate of 5%. You have $100,000 equity in the house based on a recent appraisal. You want to take out $30,000 in equity to put a pool in your backyard and pay off your student loans. The current rate for this example is 3.8%.  This situation would be favorable for a refinance as you would get the necessary capital to get rid of a recurrent monthly debt.  This will add value to your home. In addition, the refinance would result in a lower monthly payment.

Of course, in the above scenarios, we did not take into account available equity.  This would greatly affect the calculations. The best way to know is to contact an experienced mortgage lender who can help you determine current rates.  They can also help you determine your current equity position, and answer the question of is it a good time to refinance.

Mortgage Payment Breakdown

Many people are confused about the application of their monthly mortgage payment.  Such as, are property taxes included in the payment or how is the homeowners’ insurance paid?  A mortgage payment consists of principal, interest, taxes, and insurance.  A common mortgage is a 30 year fixed rate mortgage. Your monthly payment will be applied to principal, interest, taxes, and insurance during the life of your mortgage.

The insurance and taxes are a fixed amount each period.  The principal and interest vary based on an amortization schedule. What is amortization? Amortization is the reduction of principal throughout the life of a loan.  An amortization calculator shows the schedule of the application of a payment.  It breaks down the amount that goes towards principal and interest each time a payment is due. During the early years of a mortgage, a significant portion of your payment is applied to interest. As time passes, more of the payment goes towards principal than interest.

How much Equity Do I Have?

Equity is the available cash you would have after considering all costs to sell your home. Costs would include your current principal mortgage balance.  Than you would subtract the sales price and approximately 6% costs to sell. Other factors when calculating equity include any other encumbrances against the property.  This would include home equity lines of credit, or tax liens.  How do you know how much your home sale price is? By having a certified appraisal done .  A certified appraiser will take into consideration other similar homes as comparable, and what they recently sold for.

Is It a Good Time to Refinance to Lower My Monthly Payment?

Many individuals are still stuck with high interest rates. Why? Because they felt they were underwater with their current mortgage loans.  Underwater means that you owe more on your house than it is worth.  With property values rising, and reaching pre-housing bubble prices, you more than likely will be in a positive equity position.  This means you can refinance at a lower rate.  You may even be able to eliminate your monthly mortgage insurance premium.  This will lower your monthly mortgage payment. The only way to know if it is a good time to refinance is to contact an experienced industry expert today.

About the Author: Arlene Disessa is a senior writer and partner of Gustan Cho and Associates, a team of experienced mortgage industry experts.  Arlene Disessa works with a national lender and specializes in FHA loans, cash out refinances, VA loans, and loans with no lender overlays.  Our passion is to guide the customer through the refinance or home buying process. Arlene Di Sessa’s primary concern is to help the customer achieve their goals of getting the best mortgage rate possible.  Arlene Disessa is available 7 days a week to answer your questions about refinancing your home or any other questions related to your mortgage needs.  Call Us today at 530.813.0661 or email her at 7 days a week.


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