Should I Refinance Now or Wait a While?
Many homeowners are wondering if they should refinance their homes now or wait until later. Are you one of them? Perhaps you’ve heard that interest rates are low, and that you could save money by refinancing? On the contrary, you might have also heard that property values have dropped, making it harder to refinance. So, the eternal question remains: Should I refinance now or wait a while?
In this lesson, I’m going to talk about three important variables that may change over time, and how they affect your refinancing options. Specifically, we will talk about equity, credit scores and interest rates — three things that will determine whether you should refinance now or later.
Before we go any further, I’d like to point out that there are several reasons for refinancing a mortgage loan. In this article, I’m going to focus on the most common reason that people refinance their homes, which is to get a lower rate and save money over time. This is the number-one motivation people have when refinancing, so it will be the core of our now or later discussion.
What You’ll Need to Refinance Now
This discussion will make a lot more sense if we start with the requirements for refinancing. Granted, each lender has its own lending criteria, but this is what’s required in most refinance scenarios in the current economy. Generally speaking, you will need the following things to make it work:
- 20% equity or more
- A good credit score, ideally in the mid- to upper-700s or higher
- A refinancing scenario that benefits you*
The last item on the list means that your refi must work out in your favor, by saving you money in some way. Many states actually require this by law, so a lender cannot offer a refinance loan unless it works out to the borrower’s advantage. Makes sense, right? In other states, however, a lender can make just about any loan they want — even if it does not benefit the borrower. So this is a refinancing requirement you need to determine for yourself, to protect your own best interests.
If You Wait to Refinance Your Mortgage
So what happens if wait a while to refinance, instead of doing it now? As I mentioned at the start of this article, there are three key variables that may change. Here they are:
- Your equity may increase or decrease
- Your credit score may increase or decrease
- Average interest rates may increase or decrease
Each of these things will affect you when refinancing your mortgage loan. So you need to keep them in mind when deciding whether to refinance now or wait a while. Let’s talk about each one of them in turn.
1. The Equity Picture
Let’s start by talking about equity, since it’s the number-one obstacle homeowners face when trying to refinance. If you don’t have sufficient equity in your home, then you probably won’t be able to refinance your mortgage. That’s why you need to figure out where you stand in terms of equity, before you worry about anything else.
Lenders will define “sufficient equity” in their own unique ways, but it typically means 20% equity or more. Why? Because if you refinance more than 80% of your home’s value, you’ll probably have to pay for PMI coverage — and that can make the refi cost-prohibitive.
When you’re deciding whether to refinance now or wait, your equity comes into play. In fact, it might decide the matter for you. If you don’t have enough equity — or, even worse, if you’re upside down in the mortgage loan — you will have to wait to refinance down the road. You have no choice in this scenario. By the way, in order to measure your equity, you would need to subtract your current loan balance (what you owe on your mortgage) from your home’s current value. This means having the home appraised by a professional appraiser. The lender will generally send their own appraiser out to determine your home value.
2. The Credit Score Picture
How’s your credit score? When is the last time you checked it? I ask these questions, because your credit score plays a big role in the interest rate you get when refinancing your mortgage. And, by extension, the interest rate is what determines your savings (or lack of savings) after refinancing the loan. To put it more plainly — a good credit score will help you qualify for a lower rate, which is the key to saving money!
This is something else you need to consider when deciding whether to refinance now or later. If you’re in the process of improving your credit score, then it might make sense to wait a while. For example, if you increase your score from 650 to 780, you may very well qualify for the lender’s best rates. This helps you reduce the size of your monthly mortgage payment.
Of course, this is all relative to the “going rates” that lenders are offering. So you also need to consider item #3 below.
3. Average Interest Rates
Interest rates will also influence whether you refinance now or wait a while. So you need to know what’s happening with average rates in the U.S. Are they going up or down? What are they expected to do over the next year or so? You need to answer these kinds of questions making any now or later decisions about refinancing.
A few weeks ago, for instance, we had record-low interest rates (mainly because the Federal Reserve cut their own lending rates in order to stimulate the economy). But now, the rates are rising again, and they’ll probably continue a gradual rise for the rest of this year. So it’s entirely possible that you could get a lower rate by refinancing now, versus paying a higher rate by refinancing later. I can’t guarantee that — and nobody can. But that’s the way it looks to me.
Conclusion and Going Forward
As you can see, there are many considerations when trying to figure out the refinance now or wait question. You need to understand your equity situation, because it’s the number-one obstacle to refinancing for most homeowners. You need to know where you stand in terms of your credit score. And you need to know what interest rates are doing now, and what they are expected to do in the near future.
Understanding these three variables is the key to answering the question — Should I refinance my mortgage now or later? Good luck.
Related article: When Should I Refinance My Home?
Frequently Asked Questions | admin | 
July 3, 2009 8:00 am
