Refinancing is usually discussed as a comparison between two interest rates. In some cases, though, it is more like a race against time.
In particular, two characteristics of recent years have made refinancing a race against the clock. First, some of the lowest mortgage rates in history have made refinancing especially attractive. Second, a combination of financial difficulties and a depressed housing market have prevented many homeowners from taking advantage of that opportunity.
Therefore, the question is whether rates will stay low long enough for more homeowners to get in a position to refinance. Here some ways you can win this race:
- Know your refinancing target. Through mid-2014, average monthly interest rates on 30-year mortgage loans had been below 4.5 percent for nearly three years. Previously, they had never been that low before, and they have averaged 8.5 percent historically. The point is, there is no telling how much longer low mortgage rates will last, or how fast they will rise when they start to move. If you are still trying to get in a position to refinance, you should at least know what your rate target is so you will know how much of a cushion you have left.
- Keep your credit healthy. Healthy credit is often a prerequisite for refinancing. If you have been waiting for housing prices to rebound so you can refinance, make sure you keep your credit healthy in the meantime. If you have credit issues, identify what they are and start taking steps to address them. In that case, the race is one of getting your credit rating to rise before mortgage rates do.
- Divert resources toward building equity. Housing prices have been recovering, but according to the S&P/Case-Shiller Home Price Indices, the average home is still 17 to 18 percent below its peak value. This means that many homeowners are still waiting for their mortgage loans to get above water so they can refinance. Rather than assume low mortgage rates will wait around while that happens, why not speed things up by putting whatever resources you can muster into paying down your existing mortgage to rebuild equity?
- Follow the local real estate market. This means tracking both price activity in your neighborhood and mortgage lenders in your area. Real estate prices are highly localized, so you won't know how well your home's price is recovering unless you look at recent sales of comparable properties. As for lenders, following who consistently offers the best rates will help you save time when you are ready to start getting mortgage quotes.
- Understand your time frame. The race is not over once you refinance. At that point, you will have a new mortgage and the clock starts all over again. Thinking about when you want to have that mortgage paid off relative to your situation in life will help you choose the right length for your new loan.
Looking at refinancing simply as a comparison between two rates is a bit like looking at a still picture of a 100-yard dash. The reality of both the foot race and the refinancing race is that things are moving too fast to be captured by a single snapshot. Neither time nor mortgage rates stand still, so you need to keep moving to stay in the race.
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