One large silver lining of the coronavirus pandemic, if you look for it, is its substantial impact on the housing market. For current and prospective homeowners, COVID-19 has largely had a positive impact — from decreasing housing competition to record low interest rates. With the current rates cheaper than ever, existing homeowners can refinance and put more money back in their pocket.
For those currently vetting their mortgage refinance options, Credible is a great place to start as it enables homebuyers to compare rates and lenders in one place in a very short amount of time.
Read on to see how a homeowner with a mortgage of $400,000 could end up saving more than $50,000 by refinancing their mortgage right now.
Why refinance now? A $400,000 case study
For most, the current Federal Reserve rate (0-0.25 percent at time of publication) is the lowest seen since the 1970s and possibly the lowest we’ll see in our lifetime. The Federal Reserve rate hovering close to zero means it costs banks virtually nothing to borrow from the government and, in turn, they pass on those cheap interest rates to customers. This is why you see so many homeowners refinancing at once in order to take advantage of the current rock-bottom offerings.
When rates get this low, refinance activity increases. Why? Because low interest rates mean it is cheaper to borrow money and borrowers will pay less in interest on loans for large expenses like cars, houses, and higher education. Credible can help you shop around to find the lowest rates currently available.
There is a sense of urgency to refinancing now as the Federal Reserve can lower and raise rates at any point, and does so based on the state of the economy. Eventually, the economy will fully reopen, and this surge in activity may indicate to the Federal Reserve it is safe to begin raising rates.
Even a slight increase in interest means current homeowners could lose money. Here's an example:
- A homeowner refinancing their mortgage of $400,000 from 5 percent to today’s current rate of 3.125 percent will shave over $500 off their monthly payment and save $52,000 over the life of the loan.
- Compare this to another homeowner with the same mortgage, who waits until early next year to refinance because they want to see what happens after states' reopening. If the Fed raises the rates by 0.25 percent and bank rates mirror this (rising to 3.375 percent for a mortgage refinance), this homeowner would save only $44,800 on the loan and miss out on close to $8,000 in savings.
If you don't want to miss out on saving thousands of dollars, then you should consider refinancing your mortgage as soon as possible — while rates remain low. Use Credible's free online tools to find what rates you qualify for today.
3 things to know before refinancing your mortgage
Below are other examples of when it may not make sense to refinance.
1. Thin credit or a credit change: The example above features homeowners with excellent credit scores as those with stellar credit get the best rates. With so much future uncertainty, your credit may go up or down in a few months, so it’s best to lock in a refinance rate now while rates are low.
A refinance may not be the right option for certain homeowners either — if their credit profile is good, but not great, the rate difference may not justify the savings until they can increase their credit scores.
2. High loan fees: Many homeowners forget to factor the loan costs into the total amount saved by refinancing. When investigating options, it is important to remember a refinance loan is still a brand-new loan, which means the fees paid are largely the same as when you first took out the mortgage: loan origination fees, administration fees and closing costs. Recent research cited in Business Insider reveals the average refinance costs around $5,700 for homeowners.
3. Short term plans: It also doesn’t make sense to refinance if you’re planning on moving in the near future. A refinance essentially starts the “clock” over on your term. If you’ve been in your home five years, and then refinance to a low rate on a 30-year loan, the 30-year period starts from the day you refinance – not the day you initially closed on your home.
To find out if refinancing is right for you, first, take a look at loan options available via an online tool, such as Credible.
Then play with a mortgage refinance calculator tool to estimate potential savings and determine if loan costs offset the savings amount. If it looks like you’d be able to “break-even” on loan costs with the amount saved by refinancing in a few months or a year, it may make sense to take advantage of the record low rates sooner rather than later.