Mortgage rates are on the rise again. The financial crisis of 2007–2008 caused central banks to drop interest rates. Mortgage rates followed suit. As the Effective Federal Funds Rate hit rock bottom, the rates in the EU continued into negative territory. In addition, quantitative easing (QE) was applied at both sides of the Atlantic to mitigate further problems from the crisis and to keep rates down. That meant great news for home mortgage rates. In the US, the rate fell below 4 percent, a historical low. In Sweden, the average mortgage rate dropped below 2 percent. Falling mortgage rates are maybe the best reason for refinancing your home loan.
Since 2015, the Fed has begun raising rates again. In Europe, the ECB has been more reluctant to adjust the rates upwards and it kept its QE-program for approximately four years longer than the US did. Mortgage rates have begun rising but are still low.
As we might be facing a downturn in the business cycle there is uncertainty about whether rates actually will gain traction and continue rising. Others predict that interest rates will continue to rise. While the forecast for mortgage rents remains uncertain, there are nevertheless several compelling reasons to refinance your home loan.
Your credit score has improved
Your credit score changes all the time. If you get a pay raise your credit score will improve. Similarly, your score will improve as you pay off some debt. A higher credit score means less risk for the bank. Less risk means lower rates. Therefore, check your credit score to find out if it has improved. If so, that is a great reason to refinance your home loan to try and get a lower mortgage rate.
Remember that even asking a bank for an offer might affect your credit score negatively whenever the bank requests a credit report before providing you with an offer. Too many credit report requests will lower your credit score, which sends the wrong signals to any bank who might consider giving you a loan. Therefore, if you want to refinance your loan, an advice is to start by browsing a loan comparison site like for example ta-lån.com.
It is time to convert to a fixed rate mortgage
Is it time to convert to a fixed rate mortgage? This is a tricky question. Historically, the answer has been “no” most of the time. It is rarely the right time to convert to a fixed rate mortgage. The reason for this is that the bank that sells you the fixed rate mortgage package is always the winner in the long run. Otherwise it would not offer it to you.
Yet, there are at least two situations when it might pay off to choose a fixed-rate mortgage loan. The first is when you are truly sure that the mortgage rate will rise the coming years. Yes, we know, who can be sure, really? Still, you might have market insights that exceed those of the average Joe. In that case, refinancing your home loan and getting a fixed rate mortgage might save you some money.
The other situation is if you for one reason or another value full security over the long-term savings that you will be able to make by having an Adjustable-Rate Mortgage (ARM). With a fixed rate mortgage, you know how much you will have to pay each month for the duration of the contract. This makes it easier for you to budget your expenses and make some planning. If you decide to get a fixed rate mortgage, make sure to compare the offers from several banks first. Since house loans are often big in size, a small difference in rate can mean a huge difference in your pocket.
You wish to lower your monthly payment
Finally, if you for some reason want to lower your monthly payment, you need to refinance your mortgage. We generally advise against lowering your monthly payment since it means you will end up paying for your mortgage longer. This in turn means more expenses from interest rates.
Yet, there are situations where it is perfectly reasonable to lower the monthly payment. One such reason is if you need to free up funds for something else. Perhaps you are starting your own business and want to keep your other expenses at a minimum for some time. Actually, you might consider taking on some more debt in such a situation instead to finance your business expenses.
Another reason to lower the monthly payment is if your income drops. Perhaps you are planning an extended parental leave, or you decide to tick-off a few items on your bucket list and travel around the world. Freeing up some cashflow might be a good option in such cases. Just make sure to check what monthly rate the bank offers you when you ask to lower your monthly payment. If you are lucky you can maintain the same rate, but the bank might as well want to increase it to compensate for the higher risk.
Keep in mind that you can often lower your monthly payment simply by refinancing your loan and getting a lower interest rate. That is the ideal solution since it allows you to continue amortizing the same amount while paying less each month.