Is It Time to Refinance Your Mortgage?

Mortgage refinancing is when a homeowner replaces their existing mortgage with a new loan. The reasons to refinance a mortgage are to secure a lower interest rate, change the terms of a loan, or to extract some of a home’s equity from rising property values.

Simply put, refinancing a home loan is considered a good move if it saves the homeowner money or provides them with funds that they can use as they wish. Before we discuss your Wisconsin refinancing options, let’s consider what the refinancing market is like these days.

The State of Mortgage Refinancing in Wisconsin

An analysis by Construction Coverage revealed that mortgage refinancing reached a peak in 2020 and 2021, as homeowners used low interest rates to refinance their mortgages and reduce their borrowing costs. Because of the sharp rise in property values at that time, most refinancing in 2022 and 2023 were cash-out mortgages as homeowners drew on their property’s increase in value.

Of course, mortgage refinancing is still happening, and Wisconsin had the second-highest ratio of mortgage refinancing at 26.7 of mortgages refinanced for every 1,000 households with a mortgage, compared to 16.3 mortgage refinances per 1,000 mortgaged households nationwide. The median refinance loan amount for Wisconsin was $95,000, and the mortgage refinance approval rate was  82.5%. The share of refinances that were cash-out mortgages was 40.6%.

The Milwaukee-Waukesha area was second in the number of mortgage refinances among large metro areas, with a ratio of 23.9 per 1,000 mortgages. Madison came first among mid-size metro areas with a ratio of 39.7, and several Wisconsin communities made the list among small metro areas: Green Bay was first at 33.3, the Janesville-Beloit area had 32.2, and Wausau had 30.2.

The top reasons why people seek mortgage refinancing in Wisconsin are to obtain a lower interest rate or because their financial situation has changed. In some cases, they want to change the terms of their mortgage or eliminate mortgage insurance.

When Lower Interest Rates are Available

Mortgage interest rates are affected by several factors, which start with the Federal Reserve and its control of short-term interest rates. The supply and demand for lending capital, as registered in the bond market, are also important. The yield on 10-year U.S. Treasury bonds is a key factor in mortgage interest rates because both bonds and mortgages are long-term investments.

If interest rates have dropped since you obtained your mortgage, refinancing could make sense because it would be a way for you to reduce your borrowing costs. The CME Group’s Fed Watch site is a good way to keep an eye on Federal Reserve activity and the odds of it changing interest rates.

Your Credit Score Has Improved

A credit score has a direct impact on your mortgage eligibility and the interest rate you receive. If your credit score has improved since you first obtained a mortgage, refinancing could lead to a lower interest rate and save money.

To Reduce Your Monthly Payment

If you currently have a 10-year or a 15-year mortgage and want to reduce your monthly payments, you could refinance to attain a longer term. Of course, a longer term would increase your overall loan costs, but it would make it easier for you to make the monthly payments.

You Have Good Home Equity

According to Redfin, home prices in Fond du Lac have risen 7.5% over the previous year, with a median sale price of $215,000. Housing prices in Oshkosh have fallen by 7.1% from the previous year, with a median sale price of $191,000. Home prices in Waupun have dropped by 10% from the previous year, with a median sale price of $203,000.

If your home has increased in value since you bought it, a cash-out refinancing would let you replace your original mortgage with a new loan at a larger amount. You’d be able to pay off your old mortgage in full and use the extra cash however you like. People might use the proceeds to refurbish their home, help with college tuition, or consolidate and pay off any higher-interest debts they may have, such as credit cards.

Of course, home prices aren’t the only thing to consider when choosing whether a cash-out refinance is the right move. If mortgage interest rates are substantially higher today than they were when you first obtained your mortgage, a cash-out mortgage might not be a good option.

In that case, if you’re looking to consolidate debts or need a bit of extra cash, you might consider a home equity loan or a home equity line of credit (HELOC). Either of these would be like a second mortgage on your home, so you would hold onto your existing mortgage.

Changing the Terms

Another top reason to refinance a mortgage is to obtain new mortgage terms. If your current mortgage has a 30-year term, you could refinance to get a shorter term so you can pay off your mortgage faster. Of course, this depends on your financial situation and any changes to interest rates that have happened since you first obtained your loan.

A shorter term would likely result in higher monthly payments but could save you money in the long run. Some people refinance because they want to switch from a variable-rate loan to a fixed-rate mortgage, or vice versa.

Variable-rate loans typically start at a lower interest rate than fixed-rate mortgages, and even a variable-rate mortgage has a fixed rate for the first few years. Some homeowners who start with a variable-rate loan do so with the expectation that either interest rates will drop by the time their rate fluctuates, or they’ll refinance to a fixed-rate loan.

In some cases, homeowners choose a variable-rate mortgage because they expect to sell their home by the time their interest rate begins to change, and they want to take advantage of that lower initial rate.

How To Decide If Mortgage Refinancing Is Right for You

After considering all of the above factors, it’s time to get down to the actual numbers. Fortunately, we offer financial calculators that make it easy for you to see where you stand. Even if refinancing would let you acquire a lower interest rate, you’ll need to consider your breakeven point, which is how long it would take you to recover your closing costs. You might also weigh your longer-term plans, such as how long you plan to remain in your home. Refinancing might not be worthwhile if you plan to sell in a couple of years.

Why Are Mortgage Refinance Applications Rejected?

According to the Construction Coverage survey, the top reason why mortgage refinancing applications were denied in 2023 was that people’s debt-to-income ratios (DTI) were insufficient.

You can calculate your DTI by taking your pretax monthly income and dividing it by all your monthly debt payments. This includes your existing mortgage, outstanding credit card balances, and any other loans or regular payments such as child support.

The lower your DTI ratio is, the better your chances of refinancing your mortgage. For conventional loans, a DTI of 45% or less is often required, although this depends on other factors.

Credit score and credit history were responsible for 28.5% of refinancing applications being rejected. For conventional mortgages, a credit score of 620 or higher is typically required. Of course, the higher your score, and to receive a favorable interest rate.

Other reasons for applications being rejected include a lack of collateral (17.3%), an application being incomplete (11.8%), unverifiable information (5.2%), and insufficient cash to cover a down payment or closing costs (3.3%).

Making the Right Choice

Mortgage refinancing is a big step for any homeowner, so we recommend taking the time to assess your finances and your long-term goals before making such a decision. If you’re thinking of refinancing a home in Fond du Lac, Oshkosh, or Waupun, please stop by one of these locations or contact one of our mortgage lending officers who can help you consider your options or start an application.