Should I Refinance My Mortgage in 2022?
If you own a home, your mortgage will probably be one of your largest financial obligations. The mortgage interest rates are still very low compared to where they were before the pandemic, despite expectations that they will increase. If you want to refinance and save money, then now is still a good time to do so.
According to the current interest rate situation, a 30-year fixed-rate refinance comes with an average interest rate of 3.32 percent, while a 15-year fixed-rate refinance comes with an average interest rate of 2.68 percent. Refinancing is still a good idea even though interest rates have not fallen to as low as they were in the middle of the pandemic. Keep reading to find out if you should refinance now and how to know if this is right for you.
Low Interest Rates: What it Means for You
Your chance to capitalize on savings at the current refinancing rates will end soon as interest rates rise from the rock-bottom level they reached during the COVID-19 pandemic. Despite the fact that mortgage rates fluctuate from week to week, and sometimes there are unexpected drops or increases, the general trend points to increasing interest rates in the future. The good news is that interest rates are still below pre-pandemic levels, so those interested in getting financing may be able to score a good deal if they act quickly.
Refinancing: What is it?
Taking out a new loan to replace an existing one is referred to as refinancing a mortgage. While you keep your house, the mortgage terms could change.
Refinancing is commonly done for the following reasons:
Lowering your interest rate
Changing from adjustable to fixed rates
Private mortgage insurance (PMI) can be eliminated
Your mortgage can be shortened to allow you to repay it sooner
If you want to lower your monthly payment, you can extend the term of your mortgage
Refinancing: How does it work?
By refinancing your mortgage, you replace your existing loan with a new loan. You will have to go through the same steps as you would for a new home: the loan application process, the underwriting process, the home appraisal process, and the closing process. The difference is that you’ll keep your current residence, instead of shopping for a new one.
A mortgage application will require you to fill out a form and meet lender requirements in areas like credit score, debt-to-income ratio, and employment history. During refinancing, you can go with the lender you originally chose or find a new one. Refinancing is also contingent on you having enough equity in your home, which is typically at least 20 percent.
Lastly, don’t forget to budget for closing costs and fees, which can be between 3 and 6 percent of the loan amount. Creating a budget in advance will allow you to determine whether the interest you’ll save will exceed closing costs.
How do you determine a good mortgage refinance rate?
A “good” refinance rate does not have a set standard. It is generally suggested that a refinance rate be at least 1 percent lower than your current mortgage rate for a refinance to make sense. However, you must crunch the numbers to fully grasp whether a refinance is worthwhile for you.
Calculating the break-even point is one method of doing this. Due to the closing costs and fees associated with refinancing, you want to ensure that the amount you save from a lower interest rate surpasses the amount you pay in these fees. By calculating the break-even point for a refinance, you can determine how long it’ll take to recoup the upfront costs.
Make sure you shop around with multiple lenders in order to find the best refinance rates if you decide to do so. Despite the low interest rates currently available, keep in mind that specific interest rates could differ depending on factors such as your credit score and debt-to-income ratio.
Pro tip: Examine your income stability before you consider refinancing. Take your time before refinancing your mortgage if you aren’t fully secure.
The Benefits of Refinancing Now
If refinancing is on your financial agenda, now is the perfect time. Let’s look at two reasons why refinancing makes sense now.
Interest Rates Are Low
Refinance rates today are not as low as they were in the early months of the pandemic, but they are still low compared to before the pandemic. The window of opportunity may be closing soon, however, because experts predict interest rates will rise. You are more likely to save if you lock in your rate as soon as possible.
There Is Hope for Economic Recovery
Some homeowners did not refinance their homes in 2020 as a result of the pandemic-induced recession and economic uncertainty that followed. Due to the extended refinancing process, some people held off until things were more stable because it could take months to complete the process. However, the economy is slowly beginning to recover. The chance to refinance may now be available for those who weren’t able to do so last year.
Rising Equity Should Make Refinancing Easier
The recent increase in home values across Canada could make cash-out refinancing a good idea in 2022. You borrow the exact amount you owe on your existing mortgage when you refinance normally. Cash-out refinances allow you to borrow more than the remaining mortgage balance and get the rest in cash, which you can use for any reason. When you have more equity in your home, a cash-out refinance is easier, and you might be able to borrow more at a more affordable interest rate.
Mortgage Refinancing: When to Do It
Calculate the numbers yourself to determine whether you should refinance. You should look for savings of at least half a percent, and you should be confident you can pay your new monthly payment for the entire term of the loan.
You should also ensure you’re going to be able to recoup the refinance cost by staying in your house long enough. You might not want to refinance a house that you plan to sell soon if you have to pay thousands of dollars in closing costs.
Your refinance time should be based on your personal financial goals and circumstances. You might be able to save on your monthly mortgage payment if you can arrange refinancing at a lower interest rate and you can afford the closing costs. If you are uncertain about your finances or your house plans in the coming months, you might want to put off pursuing a refinance for a while.