With inflation at historic highs this year, many people are changing their spending habits and may also find themselves looking for creative ways to reduce typically-fixed expenses like housing. As a homeowner feeling financial pressure, you might consider accessing your hard-earned equity by refinancing your mortgage or selling your home. The choice may be a difficult one, however, given recent interest rate hikes and historically-high housing costs.
Let’s discuss reasons homeowners may opt to refinance, how to compare loan types, and the importance of getting expert advice for your specific situation. But first, we’ll take a look at how the 2022 economic climate and housing market may affect your decision.
How might rising interest rates, inflation, and still-high home prices affect your decision?
At the end of July 2022, the Federal Reserve raised interest rates for the fourth time since the start of the year. Meanwhile, Freddie Mac reports the average interest rate on a 30-year fixed-rate mortgage to be 5.3% — up 2.5% from the same time the year before — and Forbes reports the average 30-year fixed refinance rate to be even higher at about 5.42%.
What do these numbers mean for you if you’d like to refinance your mortgage? Depending on your current interest rate, they could mean that your monthly payment would go up, or that you end up paying significantly more interest over the life of your loan. While these rates are not high compared with the 80s, 90s, and even 2000s, if you purchased your home after 2008 (but before 2022), there’s a good chance you’ve enjoyed a lower rate.
So, what if you sell instead? Unfortunately, those rising interest rates — in combination with inflation and very high home prices — also seem to be cooling the market. For June of 2022, the National Association of Realtors® (NAR) reports that sales of existing homes were down 5.4% from the previous month and down 14.2% from one year before — even while median home prices and inventory continue rising. That makes the fifth consecutive month that sales have been down, but the 124th month of year-over-year price increases, according to the NAR.
In other words, although your home’s current market value may be higher than ever — boosting that equity you want to liquidate — it may not be as easy to sell as it would have been a mere six months or one year ago.
To get expert insight into today’s changing market, we spoke with Rick Ruiz, a top agent in Las Vegas, Nevada, who sells properties more than 48% quicker than the average agent in that area. Ruiz says that for most people who decide they need to sell to access equity, a tough market won’t stop them from listing. However, right now a seller will have their work cut out for them: “You either need to be the nicest house on the block or the least expensive. And in certain occasions, if you’re in a sector, market, or community that has a lot of homes for sale, you may need to be both.”
Fortunately, if you decide to sell, we can connect you with a top agent who is well-equipped to navigate a challenging market. It takes just two minutes to find an agent tailored to your needs.
Now that we’ve glimpsed the unique challenges of the 2022 market, it’s time to learn more about your options.
Refinancing basics: What’s the advantage of getting a new mortgage deal?
When you refinance your loan, you’re paying off your existing mortgage and replacing it with a new loan with different terms and interest rates. So, what are some possible reasons to refinance?
Reason #1 – Lowering your monthly payment
The first way a refinance may lower your payment is with a lower interest rate than your original mortgage. If rates have gone down since you purchased your home, or your credit or income is significantly improved, you probably qualify for a more favorable rate.
The second way is by extending the loan term. If your original mortgage was a 30-year loan, for example, and 10 years in you refinance to another 30-year loan, you’ll be paying on that house for a total of 40 years. However, the balance remaining after 10 years of paying will now be spread across 30 more years, significantly reducing your monthly payments.
While that may seem tempting, Ruiz strongly recommends that if you must refinance, try to not extend the length of your loan, because it’s like starting from scratch again.
Reason #2 – Saving money in the long-run
Procuring a lower interest rate also reduces the total amount of interest you’ll pay over the life of a loan. And did you know it’s possible to refinance and shorten the life of your loan? This means you pay interest over a shorter period, reducing the total interest on the loan significantly.
Reason #3 – Cashing out equity in your home
If you’re looking to access equity, a cash-out refinance will let you do just that. With this loan, you’re actually borrowing more than what you still owe on the original mortgage—essentially converting your equity into available funds to see as you see fit.
Some consider this a risky financial move. As with any option, weigh the pros and cons of a cash-out refinance carefully.
Reason #4 – Changing your loan type
Interest rates aren’t everything.
The type of loan you get is just as important. Every time you get a new mortgage or refinance, your lender will be looking at your existing financial data, including your current income, credit history, and outstanding debt to determine interest rates and loan types for which you qualify.
So, if you’re making more money, carrying less debt, and have a better credit score now than when you purchased your home, you may be able to strike a better deal, replacing your 30-year variable rate mortgage for a 15-year fixed mortgage, for example.
However, if you’re making less, carrying more debt, or having credit trouble, your chances for getting a good deal on a new loan are slim. For instance, refinancing could require you to give up your slightly higher fixed-rate mortgage for an only slightly lower variable-rate one. Even though the new rate is technically lower, you may wind up paying more in the long run.
Low equity? Freddie Mac and Fannie Mae borrowers may still be able to refinance
If you’re afraid you have too little equity in your home to benefit from a refinance, you may not necessarily be out of luck. If your original mortgage is with Freddie Mac or Fannie Mae, you may be able to apply for a high loan-to-value refinance option or an enhanced relief refinance.
Mortgage evaluation 101: How to examine current rates and compare loans
If you’re considering refinancing or selling due to financial need, the place to start is by comparing your existing mortgage rate with current ones. This will require some homework to understand the impact a different interest rate or new loan type will have on your finances over time. Here’s a helpful resource for understanding and comparing loan types.
However, this is easier said than done. While you have only one existing rate on your mortgage, there are dozens of current mortgage rates to compare it with.
Every mortgage lender determines their own rates, which is why experts recommend that you get quotes from multiple lenders and brokers. Not only that, but those rates vary within each institution depending on the loan type.
For example, the same lender may charge 4.375% interest on a 15-year, fixed-rate mortgage for a new purchase home, while charging 5.125% interest on a 30-year fixed-rate mortgage.
And when you refinance instead of buying new, those rates are often slightly higher for each loan type, depending on how you structure the loan.
With dozens of loan types and mortgage lenders to choose from, you have plenty of opportunities to find the one that best helps you financially. However, keep in mind that you may no longer qualify for the loan type you currently have.
What impacts your new or refinanced mortgage?
As we have seen, even if rates are lower on paper, that may not mean they’ll actually save you money in the long run. Let’s take a look at some factors that can increase mortgage rates and reduce the amount you save.
A loan-to-value ratio (LTV ratio) assesses a borrower’s risk level by evaluating the amount of the mortgage loan versus the current market value of the mortgaged property.
For example, if you need a $400,000 mortgage on a property valued at $500,000, you have an LTV ratio of 80%.
Remember those slightly higher refinancing mortgage rates?
Those typically occur because you’re either cashing out equity as part of the refinance, or wrapping closing costs into the new mortgage. Doing so increases the LTV ratio. If it goes over 80%, you’ll only qualify for higher interest rates and the lender may require you to pay for mortgage insurance.
If you’ve paid your existing mortgage for a number of years—and your home’s value has risen during that time—then your LTV ratio has improved and you’re likely to get a good rate.
However, if your home’s value decreased after taking out your existing loan—and you’re now upside-down on your mortgage—then your LTV worsened over time, even if you’ve been consistent in your mortgage payments. In this situation, your LTV ratio will only qualify you for the most expensive interest rates, if you qualify at all.
Closing costs, fees, and other unexpected expenses
Getting a new mortgage is going to cost you. Aside from the potential for mortgage insurance, you’re going to have closing costs and lender fees which can be between 2% to 6% of your total loan. Freddie Mac reports that the average closing costs for a refinance are $5,000.
There are also other expenses specific to you that must be accounted for when you’re calculating how much that lower interest rate is actually saving you.
For example, homeowners who received a First-Time Homebuyer Credit may need to repay that credit when closing out that first mortgage — whether refinancing or buying new.
So, keep in mind that an initial rate comparison may seem to indicate that you’ll save money with a better rate that lowers your monthly mortgage. However, those minimal monthly savings over time may not ultimately outweigh the amount you’ll pay in fees to get the new loan.
Are you in a short term problem, or is it a long-term problem?
- Rick Ruiz Real Estate AgentCloseRick Ruiz Real Estate Agent at GK Properties
- Years of Experience 20
- Transactions 1204
- Average Price Point $242k
- Single Family Homes 1001
Time to decide: Refinance or sell?
Every homeowner’s financial situation and existing mortgage structure is complex and unique, so there is no one-size-fits-all answer. To decide, it’s best to analyze your financial need and seek expert advice for your specific situation.
Decide whether your financial need is short-term or long-term
For any homeowner short on funds, Ruiz recommends first asking, “Are you in a short term problem, or is it a long-term problem?”
If your problem is short-term and very specific — say, you need help paying several large medical bills, but you’ve got typical monthly expenses covered — Ruiz suggests a third option that is especially helpful in a high-interest-rate environment: a home equity line of credit (HELOC). Although this loan type still borrows against your equity, origination fees will be much lower than for a refinance. Plus, although you may be approved for a large amount, you only take out and pay interest on what you end up needing — so you may not end up increasing your debt burden as much this way.
If your problem is longer term (and you don’t want or need to move for other reasons) Ruiz recommends a refinance over selling. “I’m a big proponent of holding real estate long-term,” he says. “I’m going to come from a place of what can I do to hold on to this asset if at all possible.”
Consult the experts
You don’t have to make such a complex and big decision alone.
The National Association of Mortgage Brokers (NAMB) offers a search feature to help you find a Lending Integrity Professional who can review your options with you. After working out the numbers with a refinancing expert, your next step is to consult with an experienced real estate agent. An agent will help you compare your potential refinancing savings with your potential profits from selling your home.
An agent is also your best resource for obtaining the comps of homes sold in your area that you’ll need to assess your home’s current market value—rather than letting your lender alone determine its worth.
Proceed with confidence
Deciding to refinance or sell is a personal financial decision. When you understand your options in light of today’s market, honestly assess your financial situation, and collaborate with experts, you’ll be equipped to make a smart decision for your home.
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- "Existing-Home Sales Slid 5.4% in June," National Association of Realtors® (July 2022)
- "Seven factors that determine your mortgage interest rate," Consumer Financial Protection Bureau (September 2017)
- "Understand loan options," Consumer Financial Protection Bureau (2022)
- "Topic No. 611 Repayment of the First-Time Homebuyer Credit," IRS (May 2022)