Rates continue to inch up faster than many experts had initially predicted they would. As we head into the spring buying season, higher rates strain affordability in a market that’s already difficult for many buyers to navigate.
By historic standards, however, rates are relatively low. This means it may still be a good time to lock in a rate or consider refinancing, especially if you’re looking to tap into some of your home’s equity.
“Even though rates are up, cash-out refinances are still effective because over the last 24 months most homeowners or most zip codes have gained between 20% and 30% equity in their homes that just appeared because of the way the market is,” says Ralph DiBugnara, president of Home Qualified and senior vice president of Cardinal Financial.
Is it a good time to buy a house?
The US is a seller’s market right now, meaning there are more buyers than there are homes for sale. Homes are expensive as a result, and bidding wars are competitive. If you don’t have enough money for a down payment on a home you like, it might not be the best time to buy a home.
But if you’re financially ready to make a down payment and cover closing costs, it could still be a good time to buy. Mortgage rates have risen — but rates aren’t necessarily high enough to affect your decision.
“Buyers currently in the market should continue to make sure that they are getting pre-approved at the updated rate levels, ensuring that the homes they’re viewing remain affordable,” Robert Heck, vice president of mortgage at Morty, says. “While the rate increases over the past month may cause some buyers to reduce their budget, this may be a sign that their budget may already have been stretched and that they may need more time to improve their financial profile.”
Is a cash-out refinance a good idea right now?
If you’re looking to tap into your home’s equity, now might be the time to do so. Many homeowners gained tens of thousands of dollars in value over the course of the pandemic; a cash-out refinance lets you tap into that wealth and reinvest it back into your home or other places.
“Now would be the time to possibly pull some of that equity out and do some other things you want, whether that’s improvements to the home or investments into something else that’s yielding a better result than real estate is,” DiBugnara says. “Now is still a really, really good time to take advantage of what you’ve gotten for free over the last couple of years.”
Of course, whether you should do any kind of refinance depends on your situation. If you can lock in a lower rate by refinancing, or if getting a cash-out refinance can help you achieve other financial goals (such as completing a much-needed home repair or consolidating high-interest debt), it may make sense for you to do so. But be sure to consider how your monthly payments would change and how the refinance fits into your overall financial health.
How do I get the lowest refinance rate?
Securing the lowest refinance rate possible breaks down into three main categories:
- Home equity: Most lenders require you to have at least 20% equity in your home to refinance — but if you have even more equity, you could be rewarded with a lower rate. You can find ways to either increase your home’s value (like with home improvements) or make extra payments to have more equity in your house.
- Credit score: The higher your credit score, the lower your interest rate could be. Check your credit report or use a free website like Credit Karma to see what needs improving for your score to go up.
- Debt-to-income ratio: Your DTI ratio is the amount you pay toward debts each month, divided by your gross monthly income. Most refinance lenders want to see a DTI ratio of 36% or less, but the lower your ratio, the better your rate will be. You can either find ways to earn more money or pay down debts to decrease your ratio.
Improving in these three categories will help you land the best refinance rate, saving you money in the long run.