Should you refinance your home? This is a big question on a lot of people’s minds. If you have been watching mortgage rates you have seen them fall and rise pretty drastically during the pandemic. So you ask yourself, is now the time to pull the trigger and refinance? My family bought our home about 2 1/2 years ago and seeing the favorable rates recently and doing the math, we decided it was a good time to refinance and take advantage of the rates. It ended up saving us a few hundred dollars a month, which is awesome! In general, if refinancing your home will save you money and allow you to pay off your mortgage sooner, it’s probably a good idea. There are a lot of factors that come into play for your individual situation so read on to see if refinancing your home during the pandemic is right for you.
Will the monthly savings offset the refinance fees?
Most people consider refinancing to get a lower interest rate. Depending on what your current interest rate is, what kind of loan you are moving to, and what will be the new offered interest rate, it may save you a few hundred dollars a month! That can make a big difference in a families’ monthly budget. Unfortunately, refinancing is not free so you will need to take those costs into account when deciding whether or not to refinance. A good estimate is that closing costs will be 3-6% of the remaining loan principal. Don’t forget to shop around, we chose to move from a large bank to a smaller local credit union due to the favorable cost of closing. After you have the new interest rate and closing costs, you have to do the math to see how long it will take for the savings to recoup the cost of closing as well as how much it will save over the life of the loan also known as your break-even analysis.
Is your credit score high enough to get favorable rates?
In order to take advantage of the most favorable refinancing rates, you need to have a good credit score. The rates shown on loan websites are usually associated with an excellent credit score. If your credit score is not very high, you may not want to refinance until it improves. On the other hand, if your credit score has improved since the time you originally received your home loan, it may be time to take advantage of your hard work and see if your new score will improve your rates.
Do you want to switch the type of loan?
Do you want to shorten the length of your loan? You may have started with a 30 year but have now decided you have enough equity and the interest rate is favorable to switch to a 15-year loan. Keep in mind that a 15-year loan will often increase your monthly payment but will hopefully get your home paid off sooner. This may not be a great option if your finances are likely to change, you lose the flexibility if your finances get worse. Another common reason to refinance is to convert to an adjustable-rate loan (ARM) or fixed-rate loan based on what you currently have you may want to switch to the opposite. ARM usually starts out lower but over the years can raise to a higher interest rate than one that is fixed. On the other hand, you may want to switch from a fixed-rate loan to an ARM if the rates are much lower, and especially if you don’t plan on being in your home for very long you may not experience the higher rate spikes. An ARM loan is also favorable if rates continue to drop since your rate would adjust to the lower rate. Again do the math to make sure it makes financial sense to switch.
Do you want to cash out some of your equity?
You may run into a situation where you need to free up some of your equity to cash in order to make home improvements, consolidate debt, or another reason that you may need a large amount of money. If that is you, you may be interested in a cash-out refinance. If you only need the cash and that is your only goal, not to lower your interest rate or change your loan term, a home equity line of credit may be more cost-effective since you will not need to pay the closing costs to refinance.
When you consider your situation and whether it is a good time to refinance or not for you, it may still be a good idea to check with borrowers to see what your options are. During the pandemic, things are changing rapidly with refinance rates as well as everyone’s job security so take your time, do your research, and make the best decision for you right now.
We love to hear from you! Please share any tips or thoughts on your refinancing during the pandemic.