To refinance or not to refinance?
“Refinancing” is a scary word for many people, but that shouldn’t be the case for you. For many homeowners, refinancing can not only lower your monthly payments and help with your monthly budget, but it can save you thousands of dollars in the long run.
So what is refinancing?
When you refinance your current mortgage, you get a new mortgage which changes the terms and rate of your current mortgage. When you get the new mortgage, your new mortgage pays off your current mortgage, so you now are paying on the new mortgage with the new rate and terms.
What is the best time to refinance?
Most people refinance to take advantage of lower interest rates. But there are some other times when it could be a good idea to also refinance your mortgage. Those times include:
When you have an adjustable rate mortgage (ARM) and your introductory period is coming close to the end. If interest rates are low and you're getting close to the end of your fixed rate introductory period, it may be a good idea to refinance your mortgage. When rates increase after the introductory period, it can be incredibly stressful and place a squeeze on your budget. Many people assume they’re stuck, but ARMs can be refinanced, just like fixed-rate mortgages. This way, you will be able to lock-in lower rates for the long term, and you won't have to worry about your rate increasing in the future.
When you have a high interest rate loan. This goes without saying, that if the interest rates have decreased since the time you purchased your home, refinancing for a more favorable rate is a great idea. With a lower interest rate, you could reduce your monthly payment, leaving you with additional money to save or put toward other financial goals, like paying off credit card debt.
If you fall into either of the categories above, refinancing may be a good option for you. But there are other things you should consider, such as the cost of refinancing and the amount of equity you have in your home.
What are the refinancing costs?
When you refinance your mortgage, you will have to pay some similar fees that you paid when you first purchased your home, such as loan origination fees, lender application fees, appraisal fees, title company fees, lender's attorney review fees, and any points you opt into, to further reduce the rate. Most loan fees about between 2-5% of the loan amount, so be sure to keep these fees in mind, when you are considering refinancing your loan.
Rates have been low for a while ... am I too late?
No, you are not too late! Interest rates are at a great rate today, making refinancing attractive for many homeowners. Refinances were up 60% in 2Q20, and up 200% versus 2Q19! Many people have already taken advantage of these low rates, but there is still time for you to participate as well! As of the time of writing this post, the rates have either remained the same or gotten even lower! Analysts are expecting rates to remain near record lows through September 2020, so if you're thinking about refinancing, you still have some time.
Is this going to be time consuming?
Don’t brush off refinancing just because it seems like a long and daunting process. An informational call with a lender to see how rates compare will only take a few minutes. There are also some programs for streamlining the application process. And besides, isn’t the amount of money you could save worth the time and effort?
When is it a bad idea to consider refinancing?
If you are currently out of work, or facing reduced pay due to job loss from COVID-19, it may be difficult to get approved for refinancing your mortgage. Be sure to check with your lender and understand the requirements for refinancing, before you begin the application process. You will be a happy you saved yourself the time, and the hard inquiry on your credit, in the long run.
Also, if you only want to refinance to give yourself more cash to spend elsewhere, such as buying a car, it may not be such a good idea. Refinancing is a great tool to help lower your monthly mortgage payment, but if you don't plan to do something productive with the money you are saving each month, it may not be worth going through the refinancing process. Be sure to do your homework and thing about the costs and benefits of refinancing before moving forward.
If you're ready to refinance after reading this post, shop around for the best rates and get the process started!
I wish you the best of luck with your refinance, and until next time, stay S.M.A.R.T. about your finances!