If you’re hoping to buy a home, one number you’ll want to get to know well is your credit score. Also called a credit rating or FICO score (named after the company that created it, the Fair Isaac Corporation), this three-digit number is a numerical representation of your credit report, which outlines your history of paying off debts.
Why does your credit score matter? Because when you apply for a mortgage to buy a home, lenders want some reassurance a borrower will repay them later! One way they assess this is to check your creditworthiness by scrutinizing your credit report and score carefully. A high FICO rating proves you have reliably paid off past debts, whether they’re from a credit card or college loan. (Insurance companies also use more targeted, industry-specific FICO credit scores to gauge whom they should insure.)
In short, this score matters. It can help you qualify for a home, a car loan, and so much more. Which brings us to an important question: What type of score is best to buy a house?
Inside your credit score: How does it stack up?
A credit score can range from 300 to 850, with 850 being a perfect credit score. While each creditor might have subtle differences in what they deem a good or great score, in general an excellent credit score is anything from 750 to 850. A good credit score is from 700 to 749; a fair credit score, 650 to 699. A credit score lower than 650 is deemed poor, meaning your credit history has had some rough patches.
While FICO score requirements will vary from lender to lender, generally a good or excellent credit score means you’ll have little trouble if you hope to score a home loan. Lenders will want the business of home buyers with good credit and may try to entice them to sign on with them by offering loans with the lowest interest rates, says Richard Redmond at All California Mortgage in Larkspur and author of “Mortgages: The Insider’s Guide.”
Since a lower credit score means a borrower has had some late payments or other dings on their credit report, a lender may see this consumer as more likely to default on their home loan. All that said, a low credit score doesn’t necessarily mean you can’t score a loan, but it may be tough. They may still give you a mortgage, but it may be a subprime loan with a higher interest rate, says Bill Hardekopf, a credit expert at LowCards.com.
How a score is calculated
Credit scores are calculated by three major U.S. credit bureaus: Experian, Equifax, and TransUnion. All three credit-reporting agency scores should be roughly similar, although each pulls from slightly different sources. For instance, Experian looks at rent payments. TransUnion checks out your employment history. These reports are extremely detailed—for instance, if you paid a car loan bill late five years ago, an Experian report can pinpoint the exact month that happened. By and large, here are the main variables that the credit bureaus use to determine a consumer credit score, and to what degree:
How to check your credit score
So now that you know exactly what’s considered a good credit rating, how can you find out your own credit score? You can get a free credit score online at CreditKarma.com. You can also check with your credit card company, since some (like Discover and Capital One) offer a free credit score as well as credit reports so you can conduct your own credit check.
Another way to check what’s on your credit report—including credit problems that are dragging down your credit score—is to get your free copy at AnnualCreditReport.com. Each credit-reporting agency (Experian, Equifax, and TransUnion) may also provide credit reports and scores, but these may often entail a fee. Plus, you should know that a credit report or score from any one of these bureaus may be detailed but may not be considered as complete as those by FICO, since FICO compiles data from all three credit bureaus in one comprehensive credit report.
Even if you’re fairly sure you’ve never made a late payment, 1 in 4 Americans finds errors on their credit file, according to a 2013 Federal Trade Commission survey. Errors are common because creditors make mistakes reporting customer slip-ups. For example, although you may have never missed a payment, someone with the same name as you did—and your bank recorded the error on your account by accident.
If you discover errors, you can remove them from your credit report by contacting Equifax, Experian, or TransUnion with proof that the information was incorrect. From there, they will remove these flaws from your report, which will later be reflected in your score by FICO. Or, even if your credit report does not contain errors, if it’s not as great as you’d hoped, you can raise your credit score. Just keep in mind, regardless of whatever credit-scoring model you use, you can’t improve a credit score overnight, which is why you should check your credit score annually—long before you get the itch to score a home.
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Think you might have trouble qualifying for a mortgage because your current credit load is a little on the high side? You'll want to speak directly with a loan officer to get a bit more specific but if you want or need to pay down debt before applying for a mortgage, there are some things you need to know.
There are two classifications of monthly payments lenders pay attention to. The first compares the total monthly mortgage payment with gross monthly income. The second looks at the first combined with all other monthly credit obligations such as a car or credit cards. Most loan programs like to see the front 'rato' be around 33 percent, expressed as 33. The back ratio likes to be around 43. Both of these numbers can be a bit flexible so make sure you don't prequalify yourself on your own. Too many times potential borrowers run their own numbers and mistakenly assume they can't qualify.
If you do want to pay down your debt, for whatever reason, there are ways to do it. The first one is to pay down existing credit balances. That seems a bit obvious I know but it's also good to know how far down to pay these balances. Lenders do want to see some credit usage so paying down your balances to zero might not be as big of a bood as one might think. It helps, don't get me wrong. But the ideal credit balance seems to be around one-third of credit lines. You can pay this down in one lump sum or by making extra payments each month.
Another tip is to pay down installment debt to less than 10 months remaining. Most loan programs ignore installment debt when there are less than 10 months on the note. If you've got a car payment with less than 10 months remaining, it won't be counted. A car loan is a good example. Speaking of car loans, a leased automobile with less than 10 months remaining will cause some additional paperwork. Lenders know that at the end of the 10-month period, you'll need to return the vehicle to the dealership or otherwise secure financing to replace the lease with a new installment loan.
One final note. If after submitting your loan application and the lender says you need to lower your ratios by paying down some outstanding debt, you can do that as well. As long as the lender says it's okay while the loan is still in process, this will lower your monthly credit payments. If this is permitted, be prepared to provide sufficient documentation that you have enough verified assets to both pay down the debt to acceptable levels while at the same time leaving enough funds available for 'cash reserves.' Cash reserves are funds that are required to be untouched after the loan has closed. Lenders want to make sure you have some money left over when the dust settles. Six months or so of monthly payments is typically enough to meet a reserve requirement.
Your loan officer can walk you through debt reduction both before and after submitting an application. Just make sure you don't try to do this on your own, you need some guidance with this.
When you’re buying something major with a loan, namely a house, you likely need a down payment. A down payment covers part of the purchase price.
Your down payment plays a role in whether you are approved for a mortgage at all. Down payments also impact your interest rate and the borrowing costs throughout the life of your loan.
Your down payment usually comes from your savings. The down payment should be a percentage of the total purchase price, and then you pay off the rest of the loan by making installment payments.
If you’re buying a house for $200,000 and want to make a 20% down payment, it’s $40,000. You would pay that when you close on your home loan. Then, you’re actually only borrowing $160,000.
There are arguments to be made both for and against making the biggest down payment possible. There are also pros and cons of a larger down payment.
The Pros of a Bigger Down Payment
If you save the cash and want to make a bigger down payment, one big benefit is reducing how much you’re borrowing. When you have a smaller loan, you’re going to pay less in total interest over the life of your loan.
You’ll also get lower payments each month.
You can use a loan calculator to see how much a larger down payment has the potential to affect your payments.
With a bigger down payment, you may qualify for lower interest rates. A lender likes a bigger down payment because they’re taking less risk on you. If you default on your loan, they see that they’ll be able to get more of their money back.
If you can manage to make a down payment of at least 20%, you can avoid paying private mortgage insurance.
Since down payments that are larger mean a smaller monthly payment, you’ll have less stress in this area.
There are opportunities to borrow against assets such as your home. The home is an asset that serves as collateral. The larger your down payment is, the sooner you build equity in your home. Then, you can borrow against that equity.
Why Would You Make a Smaller Down Payment?
While there’s a significant upside to maxing out how much you put down on a home, it’s not always the right situation. We tend to see a bigger down payment as always being better. In reality, it depends.
One reason to go with a smaller down payment is that it can take a long time to save that much cash. You may not want to wait so long to buy a house.
Even if you do save enough money for a large down payment, it can create stress to think about putting the money into a house. If you were to face an unexpected situation and had less of an emergency reserve, it could create problems.
Another reason a lower down payment could make sense for you is if you want to make any repairs or potential upgrades to the home after you buy it.
Most lenders will set a minimum down payment required, and you can always pay more than that.
Down payments will show a lender you’re serious and that you’re putting yourself on the line as far as taking a risk but think about your personal financial situation before
Refinancing your mortgage can come with all kinds of financial benefits: the potential to lower your monthly payments, save on interest costs and access cash from the equity you’ve built in your home. There are plenty of questions to answer when thinking about refinancing, including whether refinancing will raise your property taxes. Here’s what to know.
Does refinancing affect property taxes?
If you’re concerned that refinancing your mortgage will lead to unwanted changes in your property taxes, you can rest easy: Refinancing will not actually increase your bill, at least directly.
If you’re doing a cash-out refinance, refinancing can impact your property taxes if you’re using those funds for a remodel. That’s because a construction project could trigger a reassessment.
It’s also important to understand that a new mortgage will come with new terms that can impact how you set aside cash from your budget for property taxes, says Lisa Greene-Lewis, CPA and tax expert at TurboTax.
“Homeowners need to consider whether the new loan will require them to impound their property taxes, meaning pay them every month with the loan payment or whether they will pay them twice a year outside of the loan,” Greene-Lewis says. “This is a consideration as it may depend on your finances and your stream of income. Some people prefer to pay their property taxes twice a year instead of having that bump out of their pocket every month.”
If you’re going with a new lender, though, that lender might have different escrow requirements altogether, and you might need to fund the escrow account in advance of the old lender refunding the balance. Some lenders don’t give borrowers the option to self-pay property taxes, either.
While you’ll be paying closing costs and handling a lot of paperwork in the midst of refinancing, there’s one piece of good news: You might still be able to take advantage of a property tax deduction when it’s time to file your income taxes, assuming you’re itemizing instead of taking the (higher) standard deduction.
“Whether your property taxes are impounded monthly or paid twice a year, you can still deduct up to $10,000 in total state and local property taxes,” Greene-Lewis says.
Factors that impact property taxes
So, what does impact your property tax bill? The most important factor is your home’s assessed value, which is not the same as the fair market value or appraised value. For one, assessors have their own methodology that differs from that of appraisers, and while your home will be appraised in the process of refinancing, the results of the appraisal are shared with your mortgage lender, not the local tax authority.
Let’s say your home’s assessed value on your most recent property tax bill was $368,000, while the appraised value is $430,000. Your property taxes would be calculated using the $368,000 figure. Then, your local tax authority will review other assessments in the area, along with the local annual budget, to set property tax rates, also known as mill rates. Even if your home is assessed at a lower value, your taxes can still rise if the budget does.
Paying property taxes and other costs when refinancing
Refinancing will feel fairly similar to when you closed your first mortgage, and you might need to consider how to budget for property taxes and homeowners' insurance in your closing costs this time around, too.
“Depending on when the loan closes, borrowers could be required to pay property taxes through escrow,” Greene-Lewis says.
This will vary based on where you live. For example, in Illinois, property taxes are typically due on June 1 and September 1. In Arizona, the due dates for installments are November 1 and March 1.
As you prepare to set aside money for your refinance closing costs, you’ll need to determine if your current lender has already made your property tax payment. Review your escrow transaction history to see if your lender has paid the bill or ask the lender for proof of payment. You can also verify payment with your local tax authority. If you’re switching lenders, make sure the new lender has a record that your property taxes have been paid to avoid a larger-than-necessary set of closing costs.
For homeowners' insurance, you’ll likely need to update your policy if the appraised value of your home has changed. If you’re refinancing your mortgage with a new lender, you’ll need to update your policy with that lender’s information.
Don’t be intimidated by all this work, though. Proactively call your insurance company to ask for any additional needs, and make sure that you’re responding to inquiries from the new lender and your insurance provider in a timely manner.
If you’re comparing refinance rates and see a deal that can help save you money, the new loan can be a smart financial decision. While you’ll want to consider how it impacts your personal finances — the amount of interest you’ll pay and your new monthly payments, for example — you generally don’t need to stress too much about any immediate impact on your property taxes.
As home prices and mortgage rates are increasing, so are closing costs. The average payment for mortgage closing costs for a single-family property was $6,905 in 2021 (including transfer taxes), a 13.4% annual increase, according to CoreLogic’s ClosingCorp, a real estate closing cost data and technology resource.
The average price of a home in the U.S. rose by more than $50,000 last year, while the average purchase closing cost climbed by $818, including taxes, and by $390 when excluding taxes, according to the report.
“As the mortgage industry comes off two years of record-low interest rates and red-hot consumer demand, lenders are now pivoting to address increasing headwinds from higher loan origination costs and lower origination volumes,” says Bob Jennings, an executive with CoreLogic Underwriting Solutions. “The Mortgage Bankers Association recently reported lender origination costs show a 13.2% year-over-year increase, which corresponds closely to the 13.4% increase we were seeing on purchase mortgage closing costs. As the market tightens in 2022, it will be interesting to see how lenders and borrowers respond and how these key metrics move.”
The states with the highest average closing costs in 2021 (including transfer taxes) were Washington, D.C. ($29,888), Delaware ($17,859), New York ($16,849), Maryland ($14,721), and Washington ($13,927), according to the report.
On the other hand, the states with the lowest closing costs (including transfer taxes) were Missouri ($2,061), Indiana ($2,200), North Dakota ($2,501), Wyoming ($2,589), and Mississippi ($2,756).
The Federal Housing Administration is offering an exclusive look at foreclosed properties to owner-occupant buyers, government entities, and HUD-approved nonprofits.
The 30-day exclusive period will give such buyers an opportunity to bid on foreclosed properties before investors. This also gives buyers more time to secure financing for the sale.
“This policy change is critical as the nation continues to address the challenges of a real estate market in which home prices are high and the availability of affordable housing supply is low, making it difficult for individuals and families to achieve the dream of homeownership,” says Lopa P. Kolluri, principal deputy assistant secretary for housing and the Federal Housing Administration. The policy change is part of a mortgagee letter recently issued by FHA called “Expanding Affordable Housing Supply Through FHA’s Claims Without Conveyance of Title.”
The FHA says the change is to support the administration’s goal of ensuring more single-family properties go toward homeownership than to investors who turn the homes into rentals.
To participate, owner-occupant buyers must provide a signed statement that they intend to use the property as a principal residence. Nonprofit buyers must be preapproved by HUD. Government entities must provide a signed statement on their letterhead stating they are in fact a government entity.
Contracts for the properties also include a chance to withdraw if purchasers get buyer’s remorse: Buyers are given a minimum of 15 days after the date of the sales contract ratification to cancel the purchase if there is an issue with the property's condition.
With mortgage rates rising faster than they have in a decade, you might be wondering whether it’s still possible to refinance, even if you have bad credit. Good reasons for refinancing include switching from an adjustable rate to a fixed-rate mortgage, tapping into home equity or lowering your existing mortgage rate. For many borrowers, the answer is yes, you can refi. Here’s how.
Can you refinance your mortgage with bad credit?
The first thing you need to do when considering refinancing is to know your credit score and to understand what mortgage lenders are looking for in a borrower’s refinance application.
In general, a credit score of between 670 and 739 is considered good; scores between 580 and 669 are considered fair and anything below 580 is considered poor. When it comes to the credit score needed to refinance, 620 tends to be the minimum for a conventional loan. FHA refinances are possible if your credit score is as low as the mid-500s.
Homeowners with lower credit scores do have options when looking to refinance, especially since the pandemic-induced real estate boom has resulted in home values (and home equity) appreciating in many parts of the country which has a positive impact on your mortgage’s loan amount to equity ratio. It is important to note that there are lenders who work with borrowers with lower credit scores as outlined below.
8 mortgage refinance options for borrowers with bad credit
1. Try your own mortgage lender first
Mortgage lenders focus on forming relationships with borrowers. If you’re trying to refinance but have bad credit, you should start with your current lender or loan servicer since you are already their customer.
If your mortgage is with a financial institution, contact the person you dealt with originally, if they are still there. If not, “get a referral to a specific person,” advises Leslie Tayne, a financial debt resolution attorney and author of “Life & Debt.” “Having the name of someone and something in common like the referral source is an excellent way to start building the relationship. Explain your needs and find out the options the bank can offer to you.”
What you really want is the benefit of the doubt. If a lender looks at your debt-to-income ratio (DTI) and your loan-to-value ratio (LTV), as well as other factors, and your application is in a gray zone, it can go either way. You want a “yes” — and if you have a relationship with the lender, perhaps even having checking or savings accounts with them, then maybe that will be in your favor.
“Communicate often and be prepared with the [financials] the bank will be requesting to back up your request for funding,” says Tayne. “Being organized and responsive is vital. The banker will appreciate you helping him/her do their job better, which is to put the loan together for underwriting.”
2. Check out an FHA streamline refinance
If you want to refinance and you have an FHA loan, the FHA streamline refinance program can be a great option. The average credit score for a borrower who refinanced an FHA loan between October and December of 2020 was 666, according to the U.S. Department of Housing and Urban Development, with the minimum credit score to refinance of 580. However, borrowers with credit scores as low as 500 but with home equity of 10 percent or more may be approved for refinancing.
With the FHA streamline refinance program:
3. Explore an FHA rate-and-term refinance
While an FHA streamline refinance is reserved for current FHA borrowers, any borrower with a high interest rate could benefit from an FHA rate-and-term refinance. There is more paperwork involved in this process – a new appraisal and a credit check most likely will be required and the mortgage being refinanced must be current for the month due.
Like the streamline program, an FHA rate-and-term refinance is not a cash-out program — the purpose is to help you reduce your monthly housing costs. All proceeds must be used to pay your existing mortgage and costs associated with the transaction. However, this method allows 2nd and 3rd mortgages to be included in the refinanced amount.
4. Apply for a VA streamline refinance or a VA-backed cash-out refinance loan
If you have an existing VA backed home loan, you can refinance even with bad credit with a no-hassle Interest Rate Reduction Refinance Loan (IRRRL), also known as a VA streamline refinance. IRRRLs typically require that you provide financial information such as two years of W-2s and federal income tax returns as well as recent paystubs. Lenders who offer this option will also require a home appraisal.
“The VA has updated IRRRL guidelines in recent years, with a focus on ensuring the refinance makes financial sense for qualifying veterans,” says Chris Birk, director of education at Veterans United Home Loans. “Homeowners will need a minimum amount of ‘seasoning’ on their current loan in order to be eligible for an IRRRL. That typically means you must have made at least six monthly mortgage payments, although some lenders have even more stringent seasoning guidelines.”
Like an FHA streamline refinance, an IRRRL must result in a “net tangible benefit” for the borrower.
“VA homeowners must be able to recoup the costs of the new loan within 36 months of closing,” says Birk, author of “The Book on VA Loans: An Essential Guide to Maximizing Your Home Loan Benefits.” “Those costs do not include the VA funding fee or escrows.”
If you are a veteran with a current mortgage that is not a VA loan, a VA-backed cash out refinance loan lets you replace your current loan with a new one while allowing you to take cash out of your home equity. Even if you do not want to take cash out, eligible veterans with a current mortgage from a lender other than the VA should investigate this option to refinance through this program.
5. Use the USDA Streamlined Assist program
If you’re eligible, the USDA’s Streamlined Assist program can be the ideal option for a refinance with bad credit because there’s no credit review required. Instead, anyone with a loan through the USDA or backed by the USDA who has made the last 12 months’ worth of mortgage payments on time can qualify.
In addition to no credit check, this program also doesn’t require a new appraisal or home inspection and doesn’t consider your debt-to-income ratio when determining your eligibility. Like other streamline programs, there must be a certain minimum outcome – in this case at least a $50 net reduction in the monthly mortgage payment.
6. Consider a portfolio refinance loan
Another refinance option if you have bad credit is a portfolio loan. You can obtain a portfolio loan — so called because it’s held (and oftentimes serviced) by the original lender rather than being sold to other entities — through banks and mortgage brokers, who set their own standards for the loan, which can be more flexible than typical refinance requirements. You’re more likely to get a portfolio loan if you’ve been a long-time bank or mortgage customer or the lender wants your business.
That doesn’t mean lenders will finance any borrower regardless of qualifications, however. They still want portfolio loans to perform, and that means they will take a careful look at your finances and credit history. If you’ve had an application issue that has not passed muster with most lenders, a portfolio lender could be more open.
According to Tayne, some portfolio lenders “cater to smaller borrowers because it’s their specialty or primary customer base, and they’re looking to build their portfolios of small lending. Smaller borrowers typically have the potential for growth, and the more money a business is making, the more money the lender is making.”
To find out if a portfolio loan is available to you, work with a mortgage broker or a full-service mortgage lender who can shop your application to portfolio lenders.
7. Find a co-signer
If bad credit is preventing you from refinancing and locking in a lower rate, there is one strategy that can quickly change your situation: getting a co-signer/co-borrower.
A co-signer with strong credit and deeper pockets gives the lender more security, but even among family or friends, co-signing a mortgage is a business deal. Co-signers worked to get their money and credit, so you’ll have to convince them that you have the financial capacity to repay the loan, and that you’ll put repayment of the loan first before other obligations.
Delinquencies (late payments) go against both borrowers’ credit reports and If the loan were to go unpaid, the co-signer is then responsible, and the lender will look to them for any shortfall.
Some difficult questions will also have to be answered. Is the co-signer also a co-owner of the property? What happens in the event of divorce, death or a simple falling-out? Both parties should have wills, living wills and any other paperwork needed to protect estates. Get help from an attorney to get the entire arrangement in writing, to protect both yourself and your co-signer.
8. Work to improve your finances and credit
As you consider your options to refinance with bad credit, it’s important to think about how to improve your credit moving forward. If none of the above refinance options work for you, it might be a good idea to take a step back, evaluate your overall financial situation and make some changes to strengthen your financial well-being:
Most employers allow you to direct deposit to more than one account so be sure to pay yourself first by putting some money in your savings account each pay day.
Should you refinance with bad credit?
If you have bad credit, you might be wondering if you should hold off on refinancing. If you can refinance now, it’s worth consideration. Why? It might just be a critical step in helping turn that bad credit to good:
You can shrink your payments. If refinancing can lower your monthly mortgage payment, you’ll free up more of your budget to pay off other debts or add more to your savings.
You could eliminate mortgage insurance. If refinancing involves a new appraisal of your home, you could learn that your home’s value has increased. If the value has risen to the point where you now have 20 percent equity, you might be able to stop paying mortgage insurance expenses.
You could save money in the long run. There is no exact answer as to when to refinance as many factors come into play but deciding to refinance can save you quite a bit of money over the course of the entire loan. You can use Bankrate’s mortgage refinance calculator to estimate your savings.
While refinancing can save you money, remember that it costs money, too. Be sure to account for all the costs of refinancing, even with bad credit, to make sure it’s worthwhile.
Mortgage rates hit a 13-year high this week, but we’ll look away from that dreary news and instead look to some ways to navigate today’s housing market. Refinancing is a tempting option for homeowners who want to save money or pay off their mortgage faster, but you’ll want to carefully consider the pros and cons, including the impact of refinancing on your credit. In other news, learn more about VA loans and the mortgage prequalification process.
Refinancing your mortgage
Refinancing can support financial goals including saving money and paying off your mortgage faster. However, unless you’re looking to do a cash-out, now is not generally a good time to refinance due to rising rates. If you’re still considering a refinance, take into account factors such as the amount of time you plan to live in the home and the cost to obtain the new mortgage.
Read the story.
Refinancing and credit
A mortgage refinance can impact your credit score in a number of ways. For example, you may run the risk of missing payments when transitioning between loans or significantly increase your debt load, all of which can hurt your credit. Learn the steps you can take to minimize the impact of a refinance on your credit, such as avoiding big purchases.
Prequalifying for a mortgage
Prequalification can be an important step in the process of obtaining financing for a home. You’ll provide to a lender basic information including how much you earn, how much you want to borrow and how much you want to put down. The process will help you to get a sense of how much you can afford.
VA cash-out refinances
If you have a VA loan, you can tap up to 100 percent of your home’s equity in a cash-out refinance. You’ll want to use the money to support long-lasting projects, such as home improvements, rather than short-term ventures like a cruise. While it may be tempting to use a refinance to pay down or consolidate debt, doing so will deplete your home equity cushion, so think carefully about this option.
VA loan closing costs
While VA loans have lower credit score minimums and no down payment requirements, they still come with significant closing costs. Origination fees, funding fees, discount points and more typically add up to about 3 percent to 5 percent of your loan, and you can choose to pay upfront or roll those costs into your loan balance.
The Federal Reserve voted on Wednesday to raise its target short-term federal funds rate by a half-point. That marks the largest increase in the Fed’s rate in more than two decades and suggests higher mortgage rates will follow.
The Fed’s latest action looks to control inflation, which is running at a 40-year high. The federal funds rate, which is set by the central bank, is the interest rate banks use to borrow from and lend to one another. While mortgage rates are not directly tied to the Fed’s rate, they are often influenced by it.
As such, many economists say, mortgage rates will likely continue to keep climbing. Already, they’ve increased nearly 2 percentage points since just the beginning of the year, increasing the cost of monthly mortgage payments by hundreds of dollars. The 30-year fixed-rate mortgage averaged 5.10% last week, its highest level since April 2010, according to Freddie Mac.
After the Fed’s action on Wednesday, consumers likely will see changes to their borrowing and saving rates across the board, including higher credit card rates, car loans, student debt, and mortgages, economists say.
Adjustable-rate mortgages and home equity lines of credit may see the biggest impact initially since they are linked more closely to the prime rate, CNBC reports.
But the 30-year and other mortgage rates likely will still be influenced by the Fed’s actions, economists say. By the end of 2022, 30-year rates could be near 6%, says Jacob Channel, senior economic analyst at LendingTree.
That is still low by historical standards, but for home buyers already facing higher prices for homes, the effect may be to price more buyers out.
Lawrence Yun, NAR’s chief economist, said during a session at the 2022 REALTORS® Legislative Meetings this week in Washington, D.C., that he expects a slowdown in housing from its recent highs. The rapid increase in mortgage rates along with the other effects of inflation are taking a toll.
“Mortgages now, compared to just a few months ago, are costing more money for home buyers,” Yun said. “For a median-priced home, the price difference is $300 to $400 more per month, which is a hefty toll for a working family.”
Yun predicts that inflation will remain high over the next several months and that the market will see further monetary policy tightening through a series of rate hikes. Higher mortgage rates will likely slow the market, Yun says.
Like many homeowners, your monthly mortgage payment likely makes up the largest expense on your list of financial responsibilities. Although rates are rising, you might still be able to make your payment smaller if you consider an important question: Should I refinance my mortgage?
Should I refinance my mortgage?
With interest rates on the rise, now is likely not the ideal time to refinance for many borrowers.
However, the math isn’t as simple as comparing the interest rate you locked in when you were approved for your mortgage versus the rate you can qualify for now Take into account these three factors, recommends Bill Packer, executive vice president and chief operating officer of mortgage lender American Financial Resources:
The after-tax monthly savings (new payment compared to old payment after any tax-favored treatment); 2.) the amount of time that I intend to be in the home; and 3.) the cost to obtain the new mortgage. Once you know these three things, you can then calculate your return and see if it is positive
— Bill Packer executive vice president and chief operating officer of mortgage lender American Financial Resources
In addition, ask yourself these questions.
When it’s a good idea to refinance your mortgage
Generally, if refinancing will save you money, help you build equity and pay off your mortgage faster, it’s a good decision. It’s best to do if you can lower your interest rate by one-half to three-quarters of a percentage point, and plan to stay in your home long enough to recoup the closing costs.
Reasons to refinance
So, when is it a bad idea to refinance? It might not be smart to refinance if you plan to move in the near future, which gives you little time to recoup the cost.
The question of when to refinance is not just about interest rates or your timeline, either; however, it’s about your credit being good enough to qualify for the right refinance loan. The best rates and terms go to those with the best credit, so check your credit report to have a solid understanding of your risk profile. If you’re carrying a high credit card balance or you’ve missed a payment recently, you might look like a riskier borrower.
For more, check out Bankrate’s guide on the best and worst reasons to refinance.
How much can I save by refinancing?
The amount you can save by refinancing depends on factors including your closing costs, which typically total 2 percent to 5 percent of the principal amount of the loan. If you borrow $250,000 and closing costs are 4 percent, for example, you would owe $10,000 at closing.
Rather than require all that money upfront, many lenders let you roll the closing costs into your principal balance and finance them as part of the loan. Keep in mind, though, that adding those costs to the loan only increases the total amount that will accrue interest, ultimately costing you more.
You won’t begin to reap the benefits of a refinance until you reach the break-even point, where the amount that you save exceeds the amount you spent on upfront costs.
You won’t begin to reap the benefits of a refinance until you reach the break-even point, where the amount that you save exceeds the amount you spent on upfront costs. To determine the break-even point on your refinance, divide the closing costs by the amount you’ll save each month with your new payment.
Let’s say that refinancing will save you $150 per month, and the closing costs on the new loan are $4,000:
So, if you were to close your new loan today, you’d officially break even just over two years and two months from now. If you live in the home for an additional five years after that point, the savings really start to add up — $9,000 total.
You can use Bankrate’s refinance break-even calculator to figure out how long it will take for the cost of a mortgage refinance to pay for itself. If you think you might sell the home before your break-even point, refinancing might not be worth it.
Example of a mortgage refinance
Let’s say you took out a 30-year mortgage for $320,000 at a fixed interest rate of 6.23 percent. Your monthly payment would be $1,966. Over the life of that loan, you’d pay approximately $707,901, which includes $387,901 in interest.
Now say about 15 years into the loan, you’ve paid $86,551 toward the principal and $257,499 in interest and you want to refinance the remaining $233,449 of your principal balance with a new 15-year fixed-rate loan at 5.11 percent.
The new loan would trim your monthly mortgage payment to $1,859 per month, giving you an additional $107 of wiggle room in your monthly budget. Over the life of the loan, you’d pay $334,756, of which $101,307 would be interest. Add in the $344,050 in principal and interest you paid on the previous mortgage, and your total cost will be $678,806.
By refinancing, you’d not only lower your monthly payments — you’d see a long-term savings of about $30,000, less closing costs, compared with your original loan.
How long does it take to refinance a mortgage?
Refinancing a mortgage doesn’t happen overnight. The same work involved in your first mortgage — verifying your income and reviewing your credit and debt, appraising the property, underwriting and closing — applies here, too. The average refinance took 48 days to close, or about a month-and-a-half, as of April 2022, according to ICE Mortgage Technology.
Some lenders complete closings faster thanks to automated online processes. When shopping around for refinance options, ask each lender about their average closing times and the estimated closing costs you’d need to pay.
Is refinancing worth it?
If it frees up money in your monthly budget or reduces the overall cost of the loan, refinancing is well worth the work and money.
There’s no one correct path to do it, however — there are a variety of ways to refinance your mortgage. You might want to switch from an adjustable-rate mortgage to a fixed-rate loan that has a steady monthly payment, or you might want to shorten the term of your loan from a 30-year to a 15-year and save yourself a bundle in interest charges. You could also simply move from one 30-year mortgage to another 30-year mortgage with a lower rate.
Additionally, refinancing presents a way to get rid of PMI after you have accumulated 20 percent equity in your home.
Many homeowners opt for a straight rate-and-term refinance that lowers their interest rate and gives them a comfortable repayment term. Some want a lower monthly payment to free up money for other expenses, such as college tuition or an auto loan.
While rate-and-term options should help you save money, a cash-out refinance can help you borrow more of it. With this approach, you’re able to take additional cash out with the new loan that can go toward other financial moves, such as paying off credit card debt (since that has a higher APR, you’ll be reducing the cost of the debt) or for a big home remodeling project.
There are pros and cons for cash-out refinances, so you’ll need to think carefully about what you plan to do with the money to figure out whether you should increase the size of your home loan. By taking on more debt, you’re ultimately making paying off your mortgage more challenging, and likely more expensive.