The Refinance Report: Where Are Rates Headed?

If you want to tap into the value of your home for extra income, refinancing may be the perfect solution. Refinancing can be an ideal option if you are looking to decrease your monthly mortgage payment or if you need to finance a large expense, such as house renovations, college tuition or medical bills.

However, mortgage rates play a major role in the refinancing game—and as we all know, U.S. interest rates can be extremely volatile and unpredictable. Read on to learn more about the refinancing process and determine if now is the best time to refinance.

How does refinancing work?

Refinancing is the process of paying off your current mortgage and replacing it with a new one. If you refinance at a lower interest rate, your monthly payments will be lower. You can then the extra funds for other expenses, such as home improvements or bills. This is exactly why refinancing is a popular option for many homeowners in need of some additional income.

For example, say you currently have $200,000 left on your 30-year fixed rate mortgage, and you are paying a 7.5% fixed interest rate. You’ve been wanting to renovate your kitchen and bathrooms, but you simply don’t have enough income to fund the project. Refinancing may be the answer.

If a lender offers you a 5.5% fixed rate, you may want to consider refinancing your home for $230,000. Because your current balance is only $200,000, you could “cash out” the remaining $30,000 and use that money to fund your kitchen and bathroom improvements. Additionally, with a lower interest rate you’ll enjoy the added benefit of lower monthly mortgage payments—which means you’ll save even more money in the long run.

However, you should realize that you’ll probably have to pay some upfront refinancing costs, which can range anywhere from $1,000 to $3,000 or more. You must also be able to prove that you have a steady income and some equity in your home in order to refinance.

How do interest rates come into play?

When it comes to making a decision about refinancing, interest rates are usually the determining factor. If you’re considering refinancing, you should take a close look at current average mortgage rates to see if it’s worth your time and effort.

If you are offered an interest rate 2% lower than what you are currently paying on your mortgage, it is more than worth your while to refinance. On the other hand, if you can't find a rate that's at least 1.5% lower than your current rate, you may want to wait for interest rates to drop. In the meantime, you could look into alternative ways to finance your large purchase, such as a home equity loan.

Where do rates stand now? Where are they headed?

After steadily rising, rates finally started falling again. Interest rates on 30-year fixed mortgages dropped to an average 5.98%, according to Freddie Mac; average interest rates were at 6.37%.

Many financial analysts predict that interest rates will remain fairly steady for the next few months. However, some believe interest rates will start increasing again by the middle of next year. This means that now may be a good time to look into refinancing.

However, keep in mind that lenders have greatly tightened their standards. As a result, it may be difficult for many homeowners to refinance—especially those with low credit scores (600 or less). According to CNNMoney.com, in order to be approved for a mortgage right now, you’ll need to have good credit, a low debt to income ratio, a healthy down payment and verifiable income.

Do your homework

Before you take steps to refinance your home, you’ll need to do a little homework. Figure out where average mortgage rates currently stand and take the time to shop around for the lowest rate. If you can't find a rate that's at least 1.5% lower than your current rate, you may want to wait for interest rates to drop.