With mortgage rates at record lows, it is no wonder that many Americans are refinancing their homes.
Add to that the coronavirus pandemic and economic downturn, and the need to find additional cash or cut expenses becomes even greater. In fact, refinancing requests are 74% higher than a year ago, according to the Mortgage Bankers Association.
“We are telling everyone with a loan greater than 4% to consider refinancing if they still have an income,” said Winnie Sun, president and founder of the Sun Group Wealth Partners, based in Irvine, California.
That is exactly what a relative of mine did. My 62-year-old uncle recently closed the refinance of the house he shares with his wife in Morris County, New Jersey. The couple reduced their interest rate to 3.25% from 4.75% for a 30-year fixed mortgage.
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While they can now save about $ 500 a month on their mortgage payment, the couple chose to add $ 350 each month to pay off the loan in 20 years, which is what was left on their previous mortgage. They still have an additional $ 150 a month in their pockets and have the flexibility to pay the minimum if they need extra money for whatever reason.
The decision to take the 30-year fixed loan is a smart one, as monthly payments on a 15-year mortgage are higher, said Sun, a member of CNBC’s Financial Advisory Council.
While its clients get excited about the low rates and contemplate a 15-year fixed mortgage, Sun suggests keeping the extra money saved on those monthly payments in an emergency fund in case someone loses their job or the pandemic lasts longer than expected. . If they can, they can pay more each month to reduce capital, but they have the option to reduce, if necessary.
If you can cut your interest rate in half or three-quarters of a point, refinancing is worth considering.
“We are in unprecedented times and because most Americans don’t have emergency funds and half of Americans don’t have a job, it’s important to be realistic about money,” Sun said.
So how do you know if it is the right time to refinance your home?
“If you can cut your interest rate in half or three-quarters of a point, it’s worth considering refinancing,” said Greg McBride, chief financial analyst at Bankrate.com.
However, “it may not work in all those cases.”
Determine your break-even point
First, consider how long it will take you to recoup the cost of refinancing your home through your monthly savings. Then notice how that schedule matches your future plans to stay home.
“If you can reach equilibrium in two years and have no intention of moving soon, then you have the green light,” said McBride.
Get the best rate
The current rate for a fixed 30-year refinance rate is 3.34%, according to Bankrate.com.
However, that does not necessarily mean that you will get that rate.
“You have to have good credit,” said McBride. “You must have a debt ratio that is online and you must have sufficient income.”
Rates may also vary from one lender to another, so be sure to compare prices. Start with your current lender, since your information is already on file. It can speed up the rating process and possibly save you money, he said. Then look for other competitive quotes.
You may also find that your current mortgage company will match a lower rate if you have it in a competitor’s email, Sun suggested.
Look at closing costs
Another factor to consider is whether you can afford closing costs, which generally include the application fee, title fee, title search, title insurance, and appraisal fee. Refinancing typically costs 2% to 6% of your loan amount, according to LendingTree.
Some refis can be done without upfront closing costs, but the interest rate is generally higher since the costs are financed at home, Bankrate reports.
Again, compare prices as rates may vary.
“Often the best way to assess the actual cost of that loan is to look at the annualized percentage rate,” said McBride.
“It not only reflects the interest rate, but also the fees charged in relation to obtaining that loan.”
You can also get lower rates by staying with your current lender. Jeremy Crawford, a lawyer who rents an apartment in New York, is currently refinancing his Florida vacation home and only had to pay a $ 500 application fee.
Jeremy Crawford was able to reduce his mortgage interest rate to 3% from 3.75% on his Florida home.
Source: Jeremy Crawford
He bought the house, which he plans to use as his retirement home, in January and had an already low rate of 3.75%. Crawford was able to reduce it to 3%. It will close on July 17 and save $ 167 per month.
“I don’t have a 401 (k) or retirement plan, so I’ve always been working to try and get some residual income,” said the 42-year-old man.
Nor is it the first time that Crawford has refinanced. He also owns an investment property in North Carolina, which he bought as a foreclosure in 2008. He did a retirement refinance about two months ago, which many banks have temporarily stopped doing at the moment.
Crawford dropped his rate to 3.5% from 4.5% and left with approximately $ 65,000 in cash. She used a large amount of that money to buy a car and make improvements to her Florida home, including a swimming pool.
Now you are looking to start that retirement account.
“I am going to open a 401 (k) this year,” he said. “I opened an e-commerce account for the first time this year.
“I was afraid to do all of this because I wanted extra money in my pocket.”
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