In addition to its impact on our health and wellbeing, the coronavirus has wreaked havoc on the American economy. With high unemployment and an uncertain future, many people are paying closer attention to their finances. One result of the economic turmoil is that national mortgage rates have dropped to record lows. Depending on your current financial situation, now may be the best time to take advantage of low rates with a mortgage refinance.
The best place to start is with an online marketplace like Credible, where you can quickly discover your mortgage refinance options by viewing available rates from multiple lenders. If the offers available are lower than your current mortgage interest, you may want to consider a mortgage refinance.
As you prepare to refinance your mortgage — and potentially save thousands over time — there are some things you should know about the process. Read on to learn more about how a mortgage refinance works and just how much cash you could be putting back in your pocket each month if you decide to go this route.
How much can you save by refinancing your mortgage?
A mortgage refi has the potential to save you thousands of dollars over the term of your loan. A difference of even one percent in your interest rate can result in significant savings. Here are some examples of just how much money you could save over the term of your home loan if you refinance today.
- If you have a $250,000 30-year mortgage with an interest rate of 3.875 percent, and you refinance it into a 30-year mortgage with an interest rate of 2.875 percent, you would reduce your payment by $138 a month and save more than $20,000 in interest, not including closing costs.
- If you refinance that same mortgage into a 15-year mortgage with an interest rate of 2.375 percent, you reduce your total interest by more than $96,000, and choosing a 10-year loan would save more than $112,000 in interest.
You could also save big by refinancing your mortgage — especially when interest rates are at record lows. To see just how much money you could save overall, visit Credible. Credible allows you to compare mortgage lenders and shows you prequalified rates within just minutes of inserting your information.
When should you refinance your mortgage?
You may want to consider getting a new loan if you’re currently required to pay private mortgage insurance (PMI). If you can refinance your home with a loan that is less than 80 percent of the value of your home, you could eliminate the PMI charge, which can be 0.5 to 1 percent of the loan. If your home has appreciated or you can put more money down, this may be a great step.
Also, consider how many months into your mortgage you already are. If your mortgage is just a year or two old, you won't impact your term significantly if you choose a loan with the same term. But if you're 10 years into a 30-year mortgage, refinancing with another 30-year mortgage tacks 10 years onto your loan's length, erasing the headway you've made so far. If you still want to refinance, choose a shorter term, such as 15- or 10-year loan.
Refinancing your mortgage can be a smart financial move as long as you understand all the consequences. Visiting Credible to compare rates can help you make your decision.
No one knows how long the low rates will last and what the economy will bring. If you determine that refinancing is right for you, lock in low rates to save money and improve your budget in this uncertain time.
Does a mortgage refinance make sense?
While the savings can be significant, refinancing your mortgage only makes sense in certain conditions. If you plan to stay in your current home for several years, it will probably make sense to refinance to take advantage of record-low rates. But if you plan to move soon or there is a chance your employer could transfer you to a new location, refinancing might not be the right decision.
While you save money on interest, you will have to pay closing costs on the new loan, which typically costs about two percent of the amount borrowed. On a $250,000 mortgage, this could be $5,000, and it could take months to recoup the savings in interest. Calculate your break-even point by dividing your closing costs by the monthly savings. Then ask yourself if you will still be in your house that long.
For example, if refinancing your $250,000 mortgage saves $138 each month, it would take 37 months to recoup the $5,000 closing costs. If you plan to stay in your home longer than that, refinancing could make sense.
Keep in mind, converting your 30-year mortgage into one with a shorter term will increase your monthly payment. If your current job situation isn't secure, refinancing a loan with a shorter term could be a mistake. And if you’re self-employed or have been furloughed or laid off, you could find it harder to be approved.