And the owners are taking note.
As a general rule, it is worth refinancing your mortgage if the new rate is approximately 1% lower than your current rate. But there are many other factors, including closing costs, the term of your loan, and the time you plan to stay in your home, that you should consider.
What will be the new rate?
“Even those of us in the mortgage industry were surprised when rates fell below 3%,” said Ron Svoboda, mortgage loan officer for Lincoln Federal Savings Bank in Nebraska.
Last week, it closed 30-year fixed-rate mortgages for clients at rates ranging from 2.625% to 2.75%. He also saw a highly-rated borrower with a 2.125% interest rate on a 15-year fixed-rate mortgage for $ 200,000.
“With Covid-19, the elections, the economy, all we are hearing is that the rates will not go up anytime soon,” said Svoboda. “But I don’t know how much they can go down.”
“By waiting, you potentially risk not benefiting from today’s historically low rates,” he said.
High demand means that refinancing can take weeks to close.
Svoboda said the process can generally take anywhere from five to six weeks. He said that people who blocked rates weeks ago, but had not yet closed, are now asking to be blocked again at lower rates.
What are the costs?
An important reason people refinance is to reduce their monthly payments, but don’t overlook the full cost of the loan.
“Who can’t use lower debt in a time of uncertainty?” said Jason Prattes, financial advisor to Sprive Capital Management. “But the focus in this environment should be on the cost structure.”
The cost is generally around 2% to 3% of the loan amount, and origination generally costs around 1% alone, but even that can vary between banks, lenders, and online brokers. Shop around to compare lending costs from lenders, not just rates.
Other fees include processing and subscription fees, appraisal, title and application and registration. The results of your appraisal, if your home has gone up or down in value, could change the terms and cost of your loan.
Also, keep in mind: Although a loan is advertised as a “no cost” loan, it does not necessarily mean that it costs less. While the lender will not directly charge the costs upfront, the loan will likely have a higher interest rate than other options that come with the closing costs.
What is the term of the loan?
The length of the loan will determine how much total interest you pay on your mortgage. If you have lived in your home for five to 10 years and plan to stay for many more, refinancing a 30-year loan again may cost you more.
“While your monthly payment may decrease, refinancing back to a 30-year loan may end up costing you more interest because it’s essentially starting again,” said Ryan Mohr, a certified financial planner with Clarity Capital Management in Oregon.
In that case, consider refinancing for a term of 20 or 25 years, and assess the total amount of principal and interest over the life of your existing loan against a new loan before ending a refinance, he said.
When are you going to reach break-even point?
While you may want to consider refinancing if you can get a rate 1% lower than your current rate, the real deciding factor is how long it will take to recover the cost of refinancing, said Jennifer de Thomas, a certified financial planner at Birch Elliott Financial.
“The lower the total cost of refinancing, the better the deal will be,” he said.
It is important to understand your break-even point or the point where your savings on monthly payments and interest outweigh the additional costs of refinancing. If it takes you longer to get to that point than you plan on staying home, then refinancing may not be a good plan.
For example, take a loan of $ 300,000 at a rate of 4%, with a monthly payment of $ 1,400. If you refinance to 2.5%, your monthly payment is now $ 1,200 more affordable.
“But if that loan costs $ 10,000, it will take four years to recover the cost through the lowest payment,” he said. “If you plan to stay in the house, no problem. But if you sell the house next year, the amount you owe is closer to $ 310,000. Not a great deal.”
Other reasons to refinance?
Refinancing also gives you the opportunity to shorten the life of your loan.
When Sean Weaver, a certified financial planner in Southlake, Texas, did a cash withdrawal refinance on his home in 2018 to do some remodeling, he got a 4.5% rate on a 30-year fixed-rate mortgage.
You are now refinancing your 30-year mortgage with a 15-year loan. While you expect your monthly payment to increase by $ 350, you are cutting 13 years off the life of the mortgage and saving tens of thousands of dollars in interest payments.
“For many people who add $ 350 a month, [or] $ 4,000 a year, for the payment of your mortgage is not feasible, “he said.” But I can do it and it’s worth it. Now I am 43 years old and I can pay my house before turning 60 “.
Some people are also looking to refinance so they can eliminate a private mortgage insurance payment, Svoboda said.
Shoppers in recent years who didn’t have a large amount of cash to put down would have had to pay PMI, he said. “If they’ve been in that house for three or four years, by refinancing they can get out of that PMI.”
The rates are here, the deciding factor is whether it benefits you, Garg said.
“Don’t try to time the market,” he said. “If the numbers make sense to help you reach your financial goals, that’s when it makes the most sense to refinance.”
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