As 2020 continues to throw curveballs in our daily lives, many of us search for a silver lining amidst the chaos. Even during this time of economic uncertainty and a seemingly endless pandemic, there is one bright spot: mortgage rates. Interest rates for mortgages of all terms are at historic lows. If you’re a homeowner, it might be in your best interest to refinance your mortgage and save thousands.
Why You Should Refinance Now
While refinancing may not be best for everyone, many homeowners can take advantage of low-interest rates to shorten the term of their loan, free up capital for other projects, reduce monthly payments, and save money over the duration of your loan.
Here, we examine four reasons to refinance now – and two reasons you might decide to wait.
1. Lower Your Monthly Payment
If you refinance now, you could lower your monthly mortgage payment. Homeowners who have a high amount of equity in their homes would see the most significant reduction in monthly payments. However, be aware that lower interest rates have lenders adhering to stricter lending requirements, so highly-qualified applicants with a steady income will benefit the most if they refinance now.
If you purchased your home with a low down payment and currently pay private mortgage insurance, refinancing may be the best option for you. If you can use your current equity as leverage – or reach a larger down payment before closing – you could eliminate PMI from your monthly payment.
2. Shorten the Term of Your Mortgage
If you refinance now, you could reduce the term of your mortgage. For instance, refinancing from a 30-year loan to a 15-year could save tens of thousands of dollars in interest over the life of the loan. And your monthly payment might not change drastically from what you’re paying now.
Shortening the term of your mortgage means you pay less interest, and you pay off your home faster. If debt-free living is your goal, refinancing is one way to reach that goal sooner.
3. Use Your Home’s Equity
Refinancing can allow you to tap into your home’s current equity. Freeing up this capital can give you the money you need to renovate your home, pay off other high-interest loans, invest in your child’s college education, or focus on other investment opportunities. However, be mindful when using your home’s equity as it could worsen debt problems if not done carefully.
4. Switch to a Fixed-Rate Loan
If you currently have an adjustable-rate mortgage, you are unlikely to see interest rates this low again. Therefore, if you refinance now and switch to a fixed-rate mortgage, you can avoid increasing payments. By switching to a fixed-rate loan, your payments will never increase. Consequently, you will be able to better plan for the future financially.
Why You Might NOT Want to Refinance Now
The information above seems to suggest very few downsides to refinancing now. But there are a few reasons you might want to wait.
Tighter Financing Requirements
The high unemployment and unstable job market have lenders rightfully nervous. Therefore, even though rates are at historic lows, only highly-qualified applicants will be approved. If you’ve experienced job loss, a reduction in income, or a change in your credit score, you may not qualify for the lowest interest rates.
Most lenders have raised the minimum credit score to 700. Those who have a history of missed payments, high debt-to-income ratios, or other credit problems may find themselves unable to qualify for these low-interest loans.
Refinancing isn’t free. You can expect significant closing costs – often about 2-5% of the loan’s amount. That said, if you plan to move in a year or two, or you don’t have the money to pay those closing costs right now, you may want to wait. It takes time for the lower interest rate to offset the closing costs, so refinancing is better as a long-term strategy.
It’s important to run the numbers and see if you will truly save money if you refinance now, especially when you consider closing costs. An honest, experienced lender can help you determine if refinancing is the best option for you.
The bottom line? Interest rates are lower than we have seen in decades. For homeowners, it could be an excellent opportunity to lower monthly payments, access home equity, switch to a fixed-rate loan, or pay off your home faster.
But refinancing isn’t the best option for everyone. Talk with your accountant or a trusted loan expert to determine whether refinancing is in your best interest.