Record-low interest rates have many homeowners considering the option of refinancing. Aside from the possibility of getting a lower interest rate, refinancing can help homeowners lower monthly payments, shorten the length of a mortgage loan, and with enough equity even eliminate mortgage insurance. However, many homeowners are also facing an uncertain economic future due to the impact of the COVID-19 pandemic, causing them to question whether refinancing their homes makes sense.
As with most financial matters, refinancing during the pandemic is a great option for some homeowners but may not be right for others. The best way to figure out if refinancing makes sense is to do the math and see if it works in your favor. On occasion, it can actually put you in a worse financial position because the costs to refinance may outweigh the benefit of the monthly payment reduction.
If you determine, with your financial situation and longevity in your home considered, that refinancing is a wise decision, there are a few ways you can save by doing so:
1. Knowing your credit score: Applicants with higher credits scores generally receive lower interest rates, while lower scores generally result in less favorable rates. Based on your current credit score, you may not be eligible to receive an interest rate lower than what you are already paying. Several free and subscription services are available for you to monitor your credit score.
2. Securing a lower interest rate: With the average prime 30-year fixed rate below 3% (as of October 8, 2020), this could be the time to reduce your monthly payment and save money over time. Not only will reducing your interest rate save you money, but it will increase the rate at which you build equity in your home. Before you rush to refinance, ask these questions: How long will I be staying in this house? Will the closing costs be worth it? Is my current financial situation going to be requalified?
3. Shortening current loan term: It could be in your best interest to use the falling interest rates to reduce your mortgage’s term. For example, if you currently have a 30-year fixed-rate mortgage, you could refinance for a 15-year fixed-rate mortgage and only raise your monthly payment by a minimal amount, depending on your current interest rate.
4. Converting to adjustable-rate or fixed-rate mortgage: Adjustable-rate mortgages (ARMs) often offer lower rates from the start, but with periodic adjustments throughout the term, it can result in higher interest rates than a fixed-rate mortgage. With the low-interest rates, it might be financially sound to eliminate any potential rate hikes and refinance for a fixed-rate mortgage. On the other hand, if you are not planning to stay in your home for more than a few years, changing over to an ARM might save you money on your monthly payments, especially if rates continue to fall.
Depending on your financial situation during the COVID-19 pandemic, refinancing could be a great move to save you money. Be sure to do your research, use online mortgage tools to help predict which path is best for you, and speak to your mortgage lender about your options.
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