Are you considering refinancing your mortgage for better terms, like lower interest rates or monthly payments? You may be looking to take advantage of the equity in your home to pay for a large project or pay off other debt, or perhaps your short- to long-term plans for your home have changed. Swapping out your current mortgage can save you money over time, particularly if your credit score has improved.

In the wake of the COVID-19 pandemic, inflation and other factors have seen mortgage interest rates generally increase from the historic lows of 2021¹. This makes it essential to consider your options carefully, as it’s no longer as certain you’ll qualify for a lower interest rate by refinancing. The Federal Reserve has hinted at possible rate cuts in 2024, which offer future benefits for waiting. But refinancing now could still be the right choice.

Let’s take a closer look at the potential benefits of refinancing and how to navigate the process for the best results.

Understanding refinance rates.

Refinance interest rates determine your new monthly payment and interest costs. Secure a good rate, and you could save significantly over the life of your loan. Lenders calculate mortgage refi rates based on several factors:

• Credit score: Higher scores can unlock lower rates.
• Loan-to-value (LTV) ratio: The less you owe compared to your home’s value, the better your rate might be.
• Market conditions: Rates fluctuate with the economic landscape.

There are two primary types of mortgages to consider:

• Fixed-rate mortgages: These offer stability with the same interest rate and monthly payments throughout the term.
• Adjustable-rate mortgages (ARMs): These often have lower rates at the beginning of the loan, but that can change over time, following an index.

If you intend to live in your home for many years, consider a fixed-rate mortgage for its consistent payments and stability.

A fixed-rate mortgage means:

• You’ll have the same monthly payments and the same interest rate for the life of the loan.
• You’ll have an easier time budgeting for your monthly payment, as you know what it will always be.
• You’re protected against future market rate increases.
• You’ll need to refinance again to benefit from future market rate decreases.

On the other hand, if you now plan to sell the home within a few years, refinancing to an ARM has several potential benefits:

• It may save you interest, as the rates tend to start lower than a fixed-rate loan during the introductory period.
• It can increase your monthly cash flow by offering lower mortgage payments.
• It offers the potential for more savings in the future if rates are lower than they are now when your loan completes the introductory fixed-rate period and is ready for the first periodic adjustment.

Whether interest rates have declined or not, you might benefit from a refinance, but it will depend on your plans, what type of loan you have now, and how much it will cost. According to the Federal Reserve, refinancing closing costs average 3-6% of the total loan, so be sure to run the numbers for various scenarios to see if it makes more sense to refinance or to work at paying off the current loan.

You can ask your Mortgage Loan Officer to help you make these calculations.

What’s the difference between refinancing and a HELOC?

After you buy a home, you start building equity by paying down the principal balance of your mortgage and, if you’re lucky or you’ve put in some work, through your home’s appreciation in value. That equity can be a great financial tool, and a cash-out refinance is one option to take advantage of it.

But mortgage refinancing is not the only way to tap into your home’s equity. A Home Equity Line of Credit (HELOC) is a separate loan, classified as a second mortgage, that lets you borrow against the equity in your home. It often offers a variable interest rate.

Reasons to choose a refinance.

A refinance might be the right choice for accessing equity if:

• If you’re looking to lower your interest rate and prevailing rates are lower
• If you’re looking to use equity for a single large expense and want to lock in the rate for repayment.

As a first mortgage, a refinance is likely to offer a lower interest rate than a HELOC, as it typically holds a first lien position on your property, compared to a second lien position of a HELOC. A first lien position carries less risk to the lender―assuming you don’t use the same lender for both first and second mortgages.

However, it’s essential to compare rates and consider additional expenses, such as application fees and closing costs. These might be higher for a refinance than for a HELOC.

Reasons to choose a HELOC.

 Rather than refinancing your mortgage, you might explore using a HELOC if:

• You want to keep a low interest rate on your first mortgage.
• You don’t need all the cash at once. You only borrow the funds you need when you need them, potentially saving you interest.

HELOCs are ideal for those who need flexible access to funds over time. You can use funds from a HELOC for a various purposes, including home renovations, consolidating debt, or covering educational expenses.

HELOCs function much like a credit card, giving you a revolving credit line from which you can draw as needed. Interest on your HELOC balance is typically variable rate. But depending on your lender, you might have the option to convert some of the balance to a fixed-rate. You may have to pay a fee, so be sure to calculate all your costs before making a decision.

Most HELOCs have an initial ‘draw’ period where you can access funds as needed. This period is typically ten years. After the draw period, you can no longer access additional funds unless you refinance for a new HELOC. You then start paying off a remaining balance over a period of 15-20 years. You might have the option to choose interest-only payments during the initial ‘draw’ period of the loan. This can be good for your monthly cash flow, but you’ll want to be sure you can handle potentially larger payments when the ‘draw’ period ends.

HELOCs can be more flexible and cost-effective when you need access to funds over a period of time rather than a lump sum upfront. And, again, if refinancing your mortgage might cause you to lose a particularly advantageous rate, applying for a HELOC is an attractive alternative.

Impact of rate changes.

Fluctuations in interest rates have a significant impact on how much you can borrow for a refinance.

Higher interest rates decrease your borrowing capacity because your estimated monthly payments increase. They can also increase your debt-to-income (DTI) ratio, especially if you have other debt, such as a variable-rate credit card balance that you carry over from month to month and which could grow as interest rates increase.

Conventionally, when the market as a whole reflects a diminished borrowing capacity, the supply of available homes will also feel pressure. With increased interest rates, the demand for homes decreases―and so might estimated home values. Potential sellers, now able to quickly and easily track the approximate value of their home through sites such as Zillow or Redfin, may resist putting their home on the market if they feel it would be undervalued at the time.

There can always be exceptions to this dynamic, however. As of April 2024, despite higher rates, the market is impacted by a pent-up demand due to supply constraints, which in turn is keeping prices and home values static or on the rise. Portland saw a slight decrease in value over the last six months. Still, that trend seems to have reversed, and almost all markets across the US show appreciating home values.

Another aspect of the refinancing process that can be affected by high rates and diminished home values is the appraisal. Most refinances will require an appraisal. A reduction in the average amount of local home sales could make it more difficult to refinance your loan if an appraisal comes in lower than you were expecting for your home’s value.

Conversely, when rates fall, demand for homes will increase. That will gradually increase average home prices, making it easier to establish a more advantageous home value for refinancing your loan.

Does this mean you should only try to refinance when rates are low? Not necessarily, but it does mean you’ll need to carefully weigh your costs against your expected benefits.

For instance, you might be planning to buy now and refinance later for a better rate. Refinancing could reduce your monthly payments and overall loan cost if rates decrease or your term is extended sufficiently.

However, this plan’s success depends on the market. Rates could rise or other factors may change, affecting the benefits of refinancing. Extending terms with a higher rate might offer lower monthly payments but still result in more interest paid over time, and refinancing for a longer term and lower rates may or may not decrease the overall cost of borrowing―you have to factor in application fees and closing costs.

It’s crucial to assess current market trends and personal financial stability before committing to this approach. Talking with a local Mortgage Loan Officer will offer insight into the local market. You can also get a sense for how rates might trend by paying attention to the actions of the Federal Reserve, as mortgage rates tend to follow certain indexes such as 10-year Treasury Bonds.

You can also use online affordability calculators to gauge the impact of a higher rate, whether you have an ARM or you’re looking to refinance a fixed-rate mortgage for a longer term. The average ARM will increase by no more than 2% at the first adjustment, so use that figure to calculate how much your payment might go up. Does it still fit in your budget?

Deciding to refinance.

When considering a home mortgage refinance, several key factors should guide your decision. Initially, you should assess your current interest rate. Aim to refinance if you can secure a considerably lower rate than what you’re presently paying―a general rule of thumb is that a rate decrease of 1% or more makes a refinance worthwhile despite the associated fees and closing costs you’ll pay upfront. In addition to current refinance mortgage rates, you’ll also want to include the following factors in your calculations:

• Closing costs: Refinancing comes with closing costs, including appraisal, loan origination, and title insurance fees. These average 3-6% of the total loan amount. In Oregon, in 2021, the average closing costs amounted to $3,271, and in Washington, $3,824.
• Break-even point: Determine how long it will take for the savings from refinancing to outweigh the costs. It may not be beneficial to sell before this point.
• Rate lock: If refinancing, locking in a rate you’re comfortable with ensures it doesn’t change between the initial approval and closing the new loan, though fees may apply. Market rates change daily. Locking in a rate helps you generate accurate estimated payments. Ask your Mortgage Loan Officer about market trends, when you should lock your rate, and whether there is a cost to do so―many lenders do not charge a fee for a rate lock.

If you need clarification about whether refinancing is right for you, it’s always best to consult a Mortgage Loan Officer.

Current trends and future outlook.

Mortgage refinance rates have shown significant fluctuations over the past few years, responding to major economic changes such as the COVID-19 pandemic, inflation, and shifts in monetary policy.

Experts’ forecasts suggest a gradual decrease in current mortgage refinance rates through 2024, with Fannie Mae expecting rates to be a 6.40% by the end of the year² and around 6.2% by the end of 2025³. However, it’s important to temper expectations. The historically low rates of around 2.75% are unlikely to return in the foreseeable future.

Tracking these figures over time can provide some guidance over when you can refinance, but timing the market is incredibly hard, even for professional investors. You can refer to historical data such as the 30-year fixed mortgage rate trend using the St. Louis Federal Reserve’s database for a comprehensive look at past rates to try to get some sense of the patterns of interest rate increases and decreases, but there’s no foolproof system for choosing the perfect interest rate.

Instead, start by considering your own needs and circumstances, and then decide if the prevailing rates work for you. Here are some factors that might lead you to refinance regardless of prevailing interest rates:

• Have your future plans changed? If you’re looking to move in the next five years, it might be worth refinancing from a fixed-rate mortgage to an ARM to reduce your interest costs while you get ready to sell.
• A relationship change. If your relationship has ended and you want to keep a shared property, you may need to refinance your loan to remove your former partner from it. This could lead to a higher interest rate.
• Can you afford the higher monthly payments of a shorter term? If you can afford the higher monthly payments, you might benefit by refinancing from, say, a 30-year fixed mortgage to a 15-year fixed mortgage. Paying off your loan faster could save you interest in the long run. But be sure to calculate the actual savings compared to the refinancing costs.
• Do you have higher interest rate debt, such as credit cards, that you would like to consolidate? Using the equity in your home to consolidate higher rate debt could be a good move, but it depends on how much higher your mortgage interest rate becomes. A HELOC could be a smart alternative to use your equity without risking a good rate on the first mortgage.

Once you decide that your circumstances merit a refinance, be sure to comparison-shop both rates and products to make sure you find the right fit with the right lender. Your Mortgage Loan Officer can examine your finances and help you see what you qualify for and can afford.

Different refinance options.

There are several ways to refinance your mortgage, each suited for different situations. Some of the most common options include:

• Rate-and-term refinance: 
  • Adjust the interest rate and/or loan term without altering the loan balance.
  • Ideal for securing a lower rate or changing monthly payments, especially if rates have fallen since the you took the original loan.

• Cash-out refinance:
  • Refinance for more than you owe on the existing loan and receive the difference in cash.
  • This is suitable for large lump-sum expenses or debt consolidation, as you get all the funds at once.
  • It’s important to have built up at least 20% home equity ―some lenders may allow you to exceed that limit, but a higher rate might apply, and you might need to pay private mortgage insurance premiums.
  • Be mindful of the impacts of higher rates and longer terms when you refinance, as well as the larger amount of debt you have taken on.

• Cash-in refinance:
  • Includes a large payment to reduce your mortgage balance and improve loan terms. Functions similarly to a down payment.
  • Potential benefits include lowering your loan-to-value ratio, eliminating private mortgage insurance premiums, lowering your monthly payments, or obtaining a better rate.
  • Most attractive when rates have declined since you took out your loan―you’re getting a better rate and reducing the total amount borrowed, saving on your monthly payment and total interest.
  • If rates have increased, you may still benefit by refinancing from an ARM to a fixed-rate, with the cash in allowing you to establish favorable monthly payments, along with the peace of mind of a fixed-rate going forward.
  • A good option if you want to pay off your mortgage faster but want to avoid prepayment penalties. Be sure to check with your lender if they charge prepayment penalties―currently, OnPoint does not.
  • If your lender does not charge prepayment penalties, you might be better served by making a large payment to the principal balance instead of refinancing, saving on the refinancing costs.
  • Another alternative is a mortgage recast―you retain the current loan, apply a lump sum principal payment, and your loan is reamortized based on the remaining term, providing lower monthly payments and keeping the rate. There is usually a fee and a minimum requirement for the principal payment, typically $10,000 if a flat amount, but possibly a percentage of the principal.

Closing costs may vary according to the chosen refinance option. You may also have the choice to pay the fees upfront or roll them into your mortgage, which increases your overall loan balance.

Credit score and refinance rates.

Your credit score is a pivotal factor in the refinance process, often dictating the interest rates you qualify for. Generally, a higher credit score indicates to lenders that you have a history of managing your debt responsibly, which can lead to more favorable refinance rates. If your credit score has improved since you first took out the mortgage, and if interest rates have dropped, it’s worth having a conversation with your lender about a refinance.

It’s wise to check your credit score before applying for a mortgage refinance. If it’s lower than expected, don’t despair. Simple actions like paying down debt, making timely payments, and disputing any inaccuracies on your credit report can help improve your score before applying.

Comparing rates from multiple lenders.

As with any significant financial decision, it’s always a good idea to shop around and compare offers from multiple lenders. This strategy is not just about finding the lowest interest rate; it’s about finding a loan that fits your needs, including favorable closing costs and loan terms. Is the interest rate at least 1% lower than what you pay currently? If the rate is higher, can you make a large principal payment to help offset that? You’ll also want to run calculations based on the new rates to compare your potential savings to the added costs of your new loan―does the refinance make sense?

To facilitate this process, the Consumer Financial Protection Bureau’s Rate Explorer offers a valuable tool for comparing current rates based on state and credit score. This tool helps you make an informed decision tailored to your financial situation.

Refinancing for a better financial future.

Refinancing your mortgage can offer significant financial benefits if timed correctly. Consider the advantages, like reduced monthly payments and access to home equity, against drawbacks such as closing costs (3%-6% of the loan) and potentially longer loan terms. Calculating your break-even point will help determine if lower interest rates outweigh refinancing costs.

As your trusted financial partner, OnPoint is here to guide you through the refinancing process and provide you with the tools and resources you need to make an informed decision. Talk to one of our trusted local Mortgage Loan Officers to explore your options in depth.