The Federal Funds Target Rate, which is the interest rate at which financial institutions may lend to one another, is now between 2.25 and 2.5 percent according to the Federal Reserve Bank of New YorkTM. It has steadily risen since late 2015 and shows no signs of waning within the next few years. The U.S. Prime Rate for banks, which is an approximate baseline lending institutions use to set interest rates for business and consumer loans, is now at 5.5 percent according to the Wall Street Journal®. The Prime rate has also climbed since late 2015 and will likely continue its upward trajectory through 2019.
This means that some homeowners interested in refinancing their mortgage may be in a strong position to lock down better interest rates.
When and why to refinance your mortgage
A homeowner may seek to refinance his or her mortgage for several reasons, including to:
- Take advantage of lower interest rates than were available on your first mortgage.
- Reduce monthly payments.
- Expedite repayment time (e.g., change a 30-year fixed mortgage to a 15-year fixed mortgage).
- Alter the terms of the home loan to be more favorable to your current financial situation.
- To consolidate your debt under a lower rate or to fund a home improvement project with a cash-out refinance option.
A measured, well-timed refinancing of your mortgage can yield significant cost savings, but the inverse also applies. Refinancing at the wrong time or for the wrong reason may cost you more money in the long term. For example, if your current mortgage rate is lower than the market average, you may already be getting the more cost-effective deal. Refinancing is also imprudent if you plan to move in the near future, since you will have to pay closing costs on the new mortgage, and it may take a certain number of months before you can see returns on those costs.
Conversely, not refinancing if your rates are above average essentially amounts to a missed opportunity, which is why it's so important at this point in time to determine if refinancing is right for you.
Exploring your refinancing options
Some of the most common refinancing options for mortgages include:
- Fixed-rate, long-term mortgage: Interest rates are fixed for a 15- or 30-year repayment period. Average rates for a 15-year mortgage are hovering around 4 percent, according to Bankrate®; rates for 30-year fixed rate mortgages are averaging around 5 percent.
- Adjustable-rate mortgage (ARM): Interest rates adjust throughout the life of the loan based on factors such as prime rates. ARMs are riskier because they can fluctuate dramatically upon the reset period. Many homeowners will refinance to a fixed-rate mortgage for greater rate predictability when their ARM is about to reset.
- Limited cash-out refinance: This option entitles you to the lesser of 2 percent of your loan amount or $2,000 cash back. This is sensible for homeowners who want to pay off closing costs for the refinancing of their mortgage.
- Jumbo mortgage: This mortgage option exceeds Freddie Mac® and Fannie Mae® conforming limits ($484,350 in most parts of the U.S.). Jumbo loans can be fixed or adjustable and can be refinanced to tap into equity as a source of cash.
The choice to refinance, and the type of refinancing, is definitely circumstantial meaning it may or may not be the right choice for you. Contact Comerica Bank to learn more about your options.
