Why consumers should refinance now and when it makes sense to wait. (iStock)
A positive aspect of the coronavirus pandemic, if you seek it, is its substantial impact on the real estate market. For current and future homeowners, COVID-19 has had a major positive impact, from diminished housing competition to record low interest rates. With current rates cheaper than ever, existing homeowners can refinance and return more money to their pockets.
For those currently exploring their mortgage refinance options, Credible is a great place to start, as it allows home buyers to compare rates and lenders in one place in no time.
Read on to see how a homeowner with a $ 400,000 mortgage could end up saving more than $ 50,000 by refinancing his mortgage right now.
Why refinance now? A $ 400,000 case study
For most, the current Federal Reserve rate (0-0.25 percent at press time) is the lowest seen since the 1970s and possibly the lowest we will ever see. The approaching Federal Reserve rate of zero means that it costs virtually nothing for banks to borrow from the government, and in turn pass those cheap interest rates on to customers. That’s why you see so many homeowners refinancing at once to take advantage of current fund offerings.
When rates are so low, refinance activity increases. Why? Because low interest rates mean it is cheaper to borrow money and borrowers will pay less interest on loans for large expenses like cars, houses, and higher education. Credible can help you shop around to find the lowest rates currently available.
MORTGAGE RATES HIT NEW LOW REGISTRATION – HOW REFINANCING SAVES MORE MONEY
There is a sense of urgency to refinance now, as the Federal Reserve can lower and raise rates at any time, and it does so depending on the state of the economy. Eventually, the economy will reopen entirely, and this surge in activity may signal to the Federal Reserve that it’s safe to start raising rates.
Even a slight increase in interest means that current owners could lose money. Here is an example:
- A homeowner who refinances her $ 400,000 mortgage from 5 percent at the current current rate of 3,125 percent will reduce more than $ 500 of her monthly payment and save $ 52,000 over the life of the loan.
- Compare this to another homeowner with the same mortgage, who waits until early next year to refinance because they want to see what happens after the states reopen. If the Federal Reserve increases rates by 0.25 percent and bank rates reflect this (increasing to 3,375 percent for a mortgage refinance), this owner would save just $ 44,800 on the loan and lose close to $ 8,000 in savings.
If you don’t want to lose thousands of dollars, you should consider refinancing your mortgage as soon as possible, while the rates remain low. Use Credible’s free online tools to find the rates you qualify for today.
THIS MORTGAGE RATE ERROR COULD COST YOU THOUSANDS
3 things you should know before refinancing your mortgage
Below are other examples of when it may not make sense to refinance.
1. Slim credit or a change of credit: The example above shows homeowners with excellent credit scores, as those with stellar credit get the best rates. With so much future uncertainty, your credit may increase or decrease in a few months, so it’s best to set a refinance rate now while rates are low.
HOW TO GET THE BEST RATES FOR MORTGAGE REFINANCES
Refinancing may not be the right option for certain homeowners: If your credit profile is good, but not great, the rate difference may not justify the savings until your credit scores can increase.
2. High loan rates: Many homeowners forget to include the costs of the loan in the total amount saved by the refinance. When researching your options, it is important to remember that a refinance loan is still a new loan, which means that the fees paid are largely the same as when you first took out the mortgage: loan origination fees, administrative fees, and closing costs. Recent research cited in Business Insider reveals that the average cost of refinancing is around $ 5,700 for homeowners.
3. Short-term plans: There is also no point in refinancing if you plan to move in the near future. A refinance essentially starts the “clock” back on time. If you’ve been in your home for five years and then refinance at a low rate with a 30-year loan, the 30-year period begins from the day you refinanced, not the day you initially closed your home.
To find out if refinancing is right for you, first take a look at the loan options available through an online tool, such as Credible.
Then play around with a mortgage refinance calculator tool to estimate potential savings and determine if loan costs outweigh the amount of savings. If it looks like you would be able to “break even” on loan costs with the amount saved by refinancing in a few months or a year, it may make sense to take advantage of record low rates sooner rather than later.
