Falling interest rates have been somewhat of a silver lining for many new homeowners in 2020. In November of this year, the 30-year-fixed-rate mortgage hit its lowest point since 1971 — at 2.78 percent. While it has since increased slightly, these numbers have many existing homeowners wondering, “should I refinance my mortgage?”
The decision to refinance your mortgage should depend on a few factors, such as your outstanding loan amount, goals for the property, and your financial situation. Refinancing a mortgage is a big decision, and despite potentially lower interest rates, there are still fees associated with getting a new home loan. That being said, today’s market conditions could represent the right time to refinance. Keep reading to learn more about mortgage refinance rates today.
What Is Mortgage Refinancing?
Mortgage refinancing is the practice of paying off your existing home loan by replacing it with a new one. This strategy can help homeowners both secure a lower interest rate and decrease their mortgage repayment timeline. Homeowners will typically refinance for these two reasons, though refinancing can also be used to provide access to home equity or to switch mortgage lenders. A mortgage refinance can also result in a lower monthly mortgage payment.
Homeowners will find that applying for a new home loan is similar to the process they went through for their first mortgage. Lenders will typically look at their debt-to-income ratio and credit score when evaluating the application. Be sure to pay close attention to these numbers, especially if you are refinancing for a lower interest rate. Most lenders will require homeowners to have at least between 10 and 20 percent equity in their home before approving a refinance. Additionally, homeowners will need to show they have maintained a mortgage for at least 12 months.
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5 Reasons To Refinance Your Mortgage
There are several factors to consider when asking, “should I refinance my mortgage?” Homeowners are often seeking a way to improve their current mortgage, but the exact reasoning will be different for everyone. Read through the following reasons to refinance your mortgage to learn more about whether or not the process is right for you:
You Want To Change Your Loan Term
Converting To An ARM Or Fixed Rate Mortgage
For Emergency Funds Or Debt Consolidation
For Home Repairs, Improvements, or Renovations
You Need More For Retirement
1. You Want To Change Your Loan Term
Refinancing a mortgage can either shorten or extend your loan term, depending on your needs. For example, you may want to refinance if your income has changed and you are having trouble making your monthly mortgage payment. You could apply to extend your current mortgage term to a 30-year loan, which would result in lower monthly payments. Depending on your existing loan, you may end up with a higher interest rate by extending the term, but given the drop in interest rates, this is not guaranteed to happen.
Alternatively, it may be time to refinance if you want to speed up your mortgage repayment schedule. By refinancing for a shorter loan term, you can help secure a lower interest rate. While it may be obvious, it is still important to point out that refinancing your mortgage for a shorter term will result in higher monthly payments. Make sure you have a stable income before attempting to apply for a shorter loan term.
2. Converting To An ARM Or Fixed Rate Mortgage
Interest rates are one of the primary reasons homeowners will opt to refinance their mortgages. Refinancing can be beneficial for those with an adjustable-rate mortgage (ARM). While ARMs can offer lower interest rates for the first few years of the loan term, they are subject to change. Unfortunately, homeowners are responsible for any changes in interest rates, which can be brought on by market factors or even lenders. Refinancing can help homeowners avoid these hikes and ultimately reduce the amount they have to pay in interest.
It is interesting to consider that interest rates have been declining throughout 2020 due to the COVID-19 pandemic. For some homeowners, this may make an ARM more beneficial — as the historically low interest rates could reduce monthly mortgage payments. It is entirely possible to refinance from a fixed-rate mortgage to an ARM, though homeowners would then be subject to any future increases in interest rates. Read this guide if you are interested in learning more about the impact of the coronavirus on real estate.
3. For Emergency Funds Or Debt Consolidation
Homeowners may also decide to refinance if they are looking for ways to consolidate debt. Homeowners can apply for a second mortgage and use their existing home equity to pay off other high-interest debt (such as credit cards or car loans). This would leave the homeowner with one monthly mortgage payment while reducing the other payments. Although this sounds attractive, this strategy is not recommended by most financial experts. The reason is that by refinancing to consolidate debt, you risk making the same financial decisions that created the debt — while having even less equity in your home.
Despite the potential risks involved, there are some cases where refinancing could make the most sense. For example, some homeowners will opt for this route if they need to pay for a child’s college education. Homeowners may find this beneficial if the interest rate on their new mortgage is less than that on student loans. Keep in mind that there are other ways to take advantage of your home’s equity, such as a home equity line of credit (HELOC).
4. For Home Repairs, Improvements, or Renovations
There will likely come a time as a homeowner when you need to make certain repairs or renovations to keep the property in good condition. Depending on the size of the repairs, a cash-out refinance might be the best way to cover the costs. A cash-out refinance is when you refinance your mortgage for more than the initial loan and receive the difference between the two loans as a cash payment. While there is some risk involved in doing this, you will likely be able to secure a lower interest rate when compared to a credit card or personal loan. By completing home renovations, you could even increase the value of the home. Just remember to consult with a contractor before applying for the loan amount to avoid paying more than you need to during the refinancing process.
5. You Need More For Retirement
A mortgage refinance could also be used to bolster your retirement funds. For example, you could take advantage of a cash out refinance and reinvest those funds into a retirement account. That money would then grow along with the rest of your retirement savings, which could provide tax benefits depending on your retirement account. There are numerous retirement investment strategies available, though some find refinancing to be particularly attractive because of the potentially quick access to cash. Again, keep in mind that there are various risks associated with utilizing your home equity, so always mind your due diligence.
How Much Does It Cost To Refinance A Mortgage?
Unfortunately, there are some costs associated with refinancing a mortgage that go beyond just the loan amount. You might see these referred to as refinance closing costs, which typically include the costs of the loan application, title search, home inspection, attorneys, and the points fee. Certain expenses from the initial mortgage, such as property taxes and homeowners insurance, will not be included in a refinance. Homeowners should expect to pay anywhere between three and six percent of the total loan amount. For example, on a $200,000 loan, you should anticipate at least $6,000 in fees.
Many homeowners will ask, “can I refinance my mortgage with no closing costs?” The simple answer is no. While you can negotiate some of the costs, you will not be able to eliminate them completely. This is just one of several reasons why a mortgage refinance should not be taken lightly, and you should always make sure the benefits of your refinance outweigh the potential fees and costs.
Should You Refinance Your Mortgage?
You should only refinance your mortgage if you are certain the decision will help your financial situation. While there is no way to know for sure, you can carefully evaluate the pros and cons to make an informed decision. Look at your current financial situation, including your annual income, financial goals, and investments. Take time to research potential lenders who you could use for a mortgage refinance, as this will give you a better idea of the fees to expect. Finally, consider the timing of your decision.
Many homeowners will refinance as a way to save money in the long run. This could happen by securing a lower mortgage interest rate, making renovations that boost the property value, or even by consolidating other high-interest debt into a new home loan. In many cases, refinancing provides homeowners with multiple benefits. The most important thing to remember is that you should evaluate your specific financial situation before refinancing.
It is also important to note that if you are currently overwhelmed by your mortgage payment due to a job loss related to the coronavirus pandemic, refinancing is not the only option you have. The passage of the CARES Act aimed to help homeowners who were financially impacted by the COVID pandemic. Reach out to your lender to ask if you can get on a delayed payment schedule as you look for more work.
When To Refinance Your Mortgage
If you decide a mortgage refinance is the right move for you, the best time to strike is when interest rates are low. For many homeowners, that means taking advantage of the interest rates offered in 2020, but there are some other factors to keep in mind. You may also want to take time to boost your credit score before refinancing, as this will also play a role in your loan terms. If you’re going to refinance in the next year or so, make sure to submit your loan payments on time and take stock of any outstanding debts you have.
Falling interest rates have so many homeowners asking the same question: “should I refinance my mortgage?” Interest rates make a big difference in how much money you ultimately pay for a property, making this question more pressing than ever before. The right answer is going to vary from person to person. A mortgage refinance could result in lower interest rates, more manageable monthly payments, and overall more favorable loan terms. However, that is not always the case. Consider the reasons for refinancing above so you can make the decision that’s best for you.
Did we answer all of your questions on how to refinance a mortgage? If not, ask away in the comments below.
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