Mortgage rates are at all-time lows, and refinance activity is high. Pre-COVID, many homeowners may have been surprised to hear that having the same mortgage rate through the life of a loan isn’t recommended.
But with the economic changes brought on by the spread of the coronavirus, refinancing is a hot topic, and its benefits have become common knowledge.
Now, more homeowners are asking: When is the right time to do it?
The 4 Most Common Refinance Questions, Answered
Let’s get to the bottom of some of the top refinance questions, including how to know when the time is right:
1. Can refinancing reduce my monthly mortgage payment?
When you refinance your mortgage, it’s out with the old and in with the new. This means that:
- You could get a new mortgage to replace your old mortgage, a process lenders refer to as home refinancing.
- Home loan refinancing is primarily done to help you get a better interest term and rate.
- Your first mortgage will be paid off, a new mortgage loan will be created, and you may walk away with a better deal.
- If you don’t find a more attractive mortgage option at your refinance meeting, then the deal stays on the table.
There’s a basic rule of thumb for anyone thinking about a refinance: The savings must warrant the cost. Many times, a refinance is used to reduce a monthly mortgage payment, depending on your original loan terms and the adjustments that are made.
For example, if you purchased your home with a low-down payment mortgage that included mortgage insurance, refinancing right now at the current record-low rate of about 3.15 percent may provide the equity to remove this monthly cost. Rates have been steadily decreasing for several months, so the odds of refinancing and reducing your rate by a full point or more, compared to a year ago, are good.
Homeowners in cities with the highest home values, like Seattle, Portland, San Jose, Denver, New York, Boston, and Honolulu, are expected to see the most savings.
Alternately: Changing terms to a slightly lower rate may allow you to keep your payment the same while shaving off several years from your note. This, too, equates to substantial long-term savings.
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2. Do I need a good reason to refinance?
Heeding the general rule — that refinance savings should warrant the cost — many loan officers only suggest their borrowers refinance when their goals have been clearly identified.
Costs should be weighed against savings, so you understand how a new mortgage will impact your payment and cash flow. If savings exceed the average refinance closing cost — estimated at 2 to 3 percent of a loan’s total value — then refinancing has its advantages.
Here are just some of the reasons homeowners refinance:
- Cash-out to cover bills or expenses in a time of crisis.
- Change/shorten loan terms.
- Drop the added cost of mortgage insurance (PMI).
- Lower an interest rate/monthly payment.
- Pay down/consolidate high-interest debt.
- Pay for a renovation.
- Remove an ex-partner from loan documents.
- Update a mortgage in cases where credit or income has improved.
You can request a quick refinance evaluation by sending your recent mortgage statement and any questions to your loan officer. They’ll be able to run the numbers and come up with some new refinance options that might work better for you and your family.
Once a year is a good benchmark for checking in with your loan officer to reassess and revisit financial goals.
3. Can I use a refinance for renovation?
Absolutely. Refinance has become a popular option for anyone entering new life stages: When the kids go off to college, and you’re in need of extra cash, or when a longer loan term could provide some funds for home upgrades.
Home renovations can help improve the value of your house. Currently, 79 percent of homeowners are planning to embark on new projects after time spent sheltering in place. For most larger projects, an initial investment is needed.
While an in-demand feature like an eat-in kitchen can deliver a great return, it can run upwards of $23,000. Kitchen renos usually include new cabinets, appliances, flooring, and an island. Even a minor remodel may recoup an average return of 77.6 percent of every dollar spent.
A cash-out refinance is typically used to fund a renovation.
Almost across-the-board, data show that the biggest asset a family can have is the home you’re living in. Within the past 12 months leading up to the pandemic, this asset increased in value. In the last year, the average homeowner gained $7,300 in home equity.
The good news is that a home renovation need not be extravagant. Keeping your budget under $7,300 could still allow for several moderately-priced upgrades, a worthwhile investment if you anticipate putting your house on the market.
In recent months, homeowners whose jobs have been affected by the pandemic have also been using a refinance to access cash and tap into these historic amounts of equity. While it’s rare to be able to cash out 100 percent equity, qualified veterans can borrow up to 100 percent loan-to-value (LTV), and qualified homeowners can borrow up to 85 percent.
4. When is the right time to refinance?
After seeing the recent nose-dive in rates, this is the question most homeowners are asking. Commercials and online ads tout thousands of dollars in savings. But how do you know when a refinance really makes sense?
A loan officer may start by working with you to come up with a goal or motivation. As mentioned above, this might be as straightforward as reducing your monthly payment or funding a renovation.
With home values still increasing, withstanding the effects of COVID-19, many homeowners have been able to lower their monthly payment to free up cash or leverage growing equity to pay off debt. Refinance may also be required to satisfy terms in a divorce.
The only way to know for sure is by checking in with your loan officer.
Many homeowners miss out because they’re busy or feel intimidated. But processing a loan application can be accomplished in about 15 minutes over the phone (during business hours). Refinances also often require less paperwork than the home loan used to purchase.
While outcomes depend on individual factors, some loan officers report, not only a speedy timeframe, but client savings ranging from $300 to $1,000 monthly.*
Here are just two examples of what you could do with an extra $300 a month saved on your mortgage:**
- Keep the $300 and put it in savings. This adds up to $108,000 in savings over 30 years.
- Invest the $300 in a mutual fund. This adds over $422,565 to your net worth over 30 years, at an 8 percent average annual rate of return.
To put it plainly, not checking in on your mortgage could be costing you more than you need to pay. This is especially true if you’ve long been eligible for a lower interest rate.