The global pandemic ushered in a period of record-low mortgage interest rates and property owners certainly took notice. Between 2019 and 2020, the number of mortgage originations jumped from 8.3 million to 13.6 million. This significant rise was largely driven by a refinancing surge, as owners sought to cash in on the savings they could achieve as interest rates dipped, at one point, to an astonishing 2.6%.
Interest rates have already begun climbing to pre-pandemic levels. But for some property owners, it may still make sense to refinance. Are you one of them? That depends on several factors.
Why Do You Want to Refinance?
Over the years, our financial circumstances change. While the economy has come screaming back over the past few months, creating an astonishing number of new jobs, many of us lost our jobs during the pandemic and remain unemployed. Still more of us depleted our savings to a point that puts us at risk during a financial emergency. If you’re struggling to meet your mortgage payments for any reason, refinancing into a rate-and-term mortgage may make your monthly payments more manageable. Let’s say you originally took out a 30-year mortgage and you have 20 years remaining on your loan. If you were to refinance your home into another 30-year loan, the balance remaining on your loan would be spread out over more monthly payments. Your monthly payments would be lower, particularly if you’re able to secure a lower interest rate on your new loan. Bear in mind, though, that the lifetime cost of your mortgage may increase if you take that route. Still, refinancing may solve your immediate problem if you’re having trouble covering your monthly nut.
Here's another scenario to consider. Along with plummeting pandemic interest rates came a steep incline in home prices. The average increase in home values in the US was about 17% and, in certain real estate markets, considerably higher. Many homeowners received the gift of instant home equity practically overnight. Perhaps you’d like to invest in some significant home improvements. Or your kids are entering their college years and you’ll soon have hefty tuition bills to pay. For those who need access to a large sum of money in a hurry, cash-out refinancing is a great way to get it. Most mortgage lenders don’t restrict how you use the equity you extract from your home. If you’d like to purchase a second home or even take a dream trip around the world, cash-out refinancing may help you reach your goals.
What Rate Are You Paying Now?
Depending on when you took out your original mortgage, today’s rates—which are still comparatively low—may be lower than the rate you’re currently paying. If you bought your home 20 years ago, you may have been paying over 10%. If you purchased your home in 2018, you may be paying as much as 5.35% interest on your loan. Considering that even a 1% decrease in the rate you’re paying can save you hundreds of dollars each month, refinancing now could be a great move. And if you amortize the savings over a 30-year mortgage, you could save tens of thousands of dollars over the life of your loan.
Wondering how much you stand to save by refinancing? Mortgage lenders compete for your business not only with the rates they offer, but also through the services they provide. They can help you do the math. Or you can use a refinancing calculator to easily compare the savings you’d reap under various loan scenarios.
It doesn’t make sense to refinance into a higher-interest loan, of course. And you will face some costs when you refinance, including appraisal and loan origination fees and perhaps some other closing costs. Be sure to study the fine print of any mortgage you consider and factor those costs into your final decision.
How’s Your Credit Score?
Before you take out any kind of loan—and, quite frankly, every once in a while whether you’re seeking a loan or not—you should have a full picture of your credit profile. You can download a free copy of your credit reports from all three major credit reporting bureaus without affecting your credit score. If your credit score isn’t ideal, there are steps you can take to improve it. Paying down high-interest credit cards is one way. Improving your debt-to-income ratio is another. There may even be mistakes on your credit report that are bringing your score down, which you have the right to dispute.
The good news is that your credit score may have improved over the years without your even knowing it! If you earn more now than you did when you took out your original mortgage, that can have a positive impact on your credit score. If you’ve made a dent in your student loan debt over the years, that may have also boosted your score. Even simply having a longer credit history, particularly if you’ve routinely made on-time payments on your debts, puts you in a stronger credit position.
Mortgage lenders base the interest rates they offer you in large part on your creditworthiness. So if you’ve spent some years polishing your credit profile, it’s very likely you’ll be offered a lower interest rate on your refinanced mortgage than you were on your original mortgage.
Can You Handle a Higher Monthly Payment?
Perhaps you’ve been fortunate—you’ve landed a higher-paying job or won the lottery, for example—and today you can spend money more comfortably each month. If you’re willing to spend a little more each month, you have the opportunity to reduce the lifetime cost of owning your home by refinancing into a shorter-term mortgage. Shorter-term mortgages typically come with lower interest rates. So the extra money you would have to pay by compressing your loan into a shorter time frame may be offset by the lower rate you’re able to secure. This strategy can benefit you regardless of whether you choose rate-and-term or a cash-out mortgage.
Our Top Tips Summed Up
• Be clear on your financial goals and reasons for refinancing. Are you trying to lower your monthly payments? Take equity out of your home to pay for other expenses? Lower the lifetime cost of owning your home? The best refinancing product for you will differ based on what you hope to accomplish.
• Make yourself more creditworthy. Many people don’t understand how much their credit profiles influence their expenses. People with low credit scores pay more for everything from car insurance to rent to home loans. Before you refinance your mortgage, make every effort to raise your credit score. It takes patience to do so: credit scores increase slowly based on the good habits you adopt. But in the long run, you’ll save money on many purchases.
• Calculate the full cost of refinancing. Even if your monthly payments decrease, if you have to pay several thousand dollars in closing costs, it may take you a while to break even. Just be sure you understand all of the costs of refinancing.
• Consider a shorter-term loan. If you can afford to make higher monthly payments, you can significantly lower the lifetime cost of owning your home. The cash you save can make a big difference down the road. You may enjoy a more comfortable retirement, for example. Long-term savings can also prepare you to manage unexpected expenses.
• Shop around before you decide to refinance. Investigate your options with multiple mortgage lenders, including your local credit union. Credit unions can often beat the refinancing deals that private lenders offer. Often, so can non-traditional financial technology companies. Fintech companies have had a disruptive effect on the mortgage lending market. So think outside the bank box. The internet makes it easy to compare refinancing offers side by side from the comfort of home.
Time It Right
Lending markets are influenced by a wide range of economic factors. While no one can predict exactly where mortgage interest rates and home prices will go, most experts today agree that interest rates will continue to rise this year. That bodes for acting quickly if you’re thinking of refinancing your home. Take the time to do your homework, of course, but if you wait too long, your greatest savings opportunity may pass you by.
Author Bio:
Susan Doktor is a journalist, business strategist, and principal at Branddoktor. She writes on a wide range of personal finance topics, including the mortgage market, student loans, insurance, and more. Her contribution comes to us courtesy of Money.com
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