Mortgage rates have once again dropped to record lows in recent weeks—setting a new all-time low for the third time this year. In late May, the average rate for a 30-year fixed loan decreased to 3.15 percent, according to data from Freddie Mac. Unfortunately, for those who have lost their jobs due to (or prior to) the pandemic, refinancing is not likely to be an option right now. However, for those who are still employed, a refi might be a good financial move—helping you to save on your monthly payments and reduce the amount of interest you pay over the life of your loan. Is it the right move for you? Check out our step-by-step refi considerations below.
Mortgage Rate: The starting place for considering whether to refinance your mortgage is how much you can reduce the interest rate on your mortgage and how that would impact your monthly payment. For example, if you can shave 0.5 percent off your mortgage rate and reduce your payment by $200 per month, it might be worth pursuing.
Plans to Stay in Your Home: The next step would be to consider how much it will cost to refinance and whether it’s worth incurring that expense in light of the monthly savings. How many months will it take to recoup the refi expense? If it costs $3,600 in fees to refinance and you will save $200 per month, then it will take 18 months to recoup the costs. Do you plan to stay in your house longer than that? If so, refinancing may be a good idea.
Need for Improved Cash Flow: Have you lost some income or incurred new expenses as a result of the pandemic and cash flow is tight? That might add to your reasons to refinance, especially if you can reduce your monthly payment by a substantial amount. The cost of refinancing can be wrapped into the loan amount, so you do not necessarily have to pay any closing costs out-of-pocket (though it may be a good idea to do so, if you can afford it).
Impact on Amortization: The internet offers a multitude of amortization calculators that will show the whole amortization schedule for your loan. This maps out how your mortgage will be paid off over time—i.e. how much of your payment is allocated to paying off the principal versus interest each month for the life of the loan. If you don’t need to refi in order to improve cash flow and are just weighing whether it’d be a smart financial move, you should consider how a refi would affect the amount of your monthly payment that is allocated to principal. For instance, if you are more than 5 years into your loan, refinancing might significantly lower the amount going to principal, which builds up the amount of equity you have in your home. Even if you reduce the term—e.g. move from a 30-year fixed to a 20-year or 15-year fixed loan—you may still be paying less against the principal for the first few years.
Cash-Out Refi: Even if you can’t lower your interest rate by a huge amount but you need to cash in on some of your existing home equity—e.g. to pay for a kid’s college, to add on to your home, etc.—refinancing might provide a good way to raise cash at a relatively low (and fixed) rate. It’s very important to note though that when you add to your mortgage balance, you are effectively deciding to spread out the payments for that expense over the whole life of the loan (e.g. 15 or 30 years), so it would be prudent to seek the advice of a financial adviser before deciding on that. In addition, if any of your mortgage balance is used for purposes other than improving your house, the interest on that portion of the loan is not tax deductible.
Switching from an ARM: If you have an adjustable rate mortgage that will soon be adjusting its rate upward, that might be another reason to consider refinancing.
If you are unsure whether refinancing would be the right move for you, please reach out to us, and we will help you consider all of the relevant factors. Most of the refi process can be completed remotely, and many companies are having clients sign the final documents outside or from their cars, so it is possible to pursue a refi without taking unnecessary health risks, even in these unusual circumstances.
