We’re living in unprecedented times. The COVID-19 pandemic, economic sluggishness and social unrest seems to have dominated the headlines and put many Americans’ plans to refinance or buy a home on hold. But in truth, refinancing and home purchasing can still occur, and experts say now could be a great time to do either. Refinancing may be especially beneficial to homeowners right now, considering rates are near historic lows.
Financial expert Dave Ramsey says, “The time to refinance is when you want to make a less-than-desirable mortgage better with a new interest rate.”
“Do a break-even analysis to see if refinancing is something worth doing in your situation,” He explains in an article posted on his website, daveramsey.com. “A break even analysis means running the numbers on whether you’ll be in your home long enough to benefit from the savings that a lower interest rate and payment could bring.”
The advice of popular financial gurus aside, there are other factors to consider when weighing the pros and cons of refinancing right now.
Sure, you may be able to lock in a great interest rate and potentially save a lot of money through refinancing right now. But with the uncertainty that the COVID-19 pandemic has brought, and experts warning that a second wave of infections could be possible later this year, it may not be wise to refinance if your employment status isn’t secure. Essential workers who haven’t had to face the loss of employment may not have to worry. Other working homeowners whose employment is rooted in the service industries such as retail, hospitality, food service, small business owners, etc. may face a bigger financial risk. Likewise, homeowners who are drawing unemployment benefits may have a harder time qualifying for a mortgage or a refinance.
Don’t let these things scare you away from refinancing. Remember, everyone’s situation is different and until you actually sit down with a qualified lending professional and review your scenario, you won’t know for sure whether or not a refinance is possible or beneficial to you. It’s important to understand the costs, risks and benefits involved–but it’s also a good idea to keep an open mind. When you schedule a consultation with a refinancing loan professional, have a list of questions to ask. Voice your concerns. Keep communication clear and open. Even if you decide not to refinance right away, you’ll at least be able to walk away with a clear picture of what your homeownership and refinancing goals are for the future.
Reasons to Refinance
There are multiple benefits to refinancing a mortgage. If you feel that a refinance could benefit your overall savings and homeownership plan, and you feel secure enough in your credit, employment and plans to stay in your home for at least a few more years, refinancing may be one of the best financial decisions you could make.
Here are some of the reasons homeowners choose to refinance:
1.) Getting Cash Out
When you build up substantial equity in your home, you may decide to do a cash out refinance so you can use some of that equity to help pay for other things. Cash out refinancing basically works like this: a homeowner refinances their mortgage for more than what they owe on it, and receives the difference in cash. They can use the money for anything they like, but many homeowners choose to use that cash to settle other debts (like high-interest credit cards, student loans, medical bills, etc.), invest in something else (use the cash for a down payment on another home, paying tuition to go back to school, start a small business, invest in the stock market, etc.), or reinvest the money into the home through remodeling projects, upgrades, etc.
2.) Shorten or Lengthen the Loan Term
If you have a 30 year mortgage, you may decide that, while it’s the most common loan term, it’s not ideal for you and your financial goals. Some homeowners decide to refinance their mortgage simply to adjust the term, either by making it shorter so they can pay off more of the principal sooner, or by making it longer and thereby lowering their mortgage payment. For instance, if you have a 30 year mortgage but you want to own your home sooner and build equity faster, you could refinance your loan into a 15 year mortgage. This will likely increase your monthly mortgage payment, but you’ll pay less in interest over the whole course of the loan.
By contrast, if you have a 15 year mortgage and you want to lower your monthly payments, you could refinance your loan to a 20 or 30 year mortgage. This means you might pay more over the long term, since you’re extending your loan term; however, your monthly payment will likely decrease. This can be a great option for homeowners who are not so focused on longterm savings but are more payment-conscious.
3.) Switching From Adjustable to Fixed and Vice Versa
Adjustable rate mortgages (ARMs) can be a good option from some homeowners, but they aren’t ideal for everyone. The way most ARMs work is they offer an initial rate that stays the same for a certain number of years (usually 3, 5 or 10 years). Once the initial rate period expires, the rate will then be subject to adjustment every year.
Most home buyers who choose an ARM loan do so because the initial interest rate is usually lower than those attached to conventional fixed rate mortgages. This allows the homeowner to save a considerable amount of money during the early years of homeownership. However, once they approach the end of their initial rate term, many homeowners decide to refinance to a traditional fixed rate mortgage so they don’t have to worry about their rate (and payment) fluctuating.
4.) Lowering Monthly Payment With a Lower Interest Rate
Finally, one of the most common reasons for refinancing, is getting to lock in a lower interest rate. When mortgage rates are trending lower, a lot of homeowners choose to refinance so they can lock in a lower rate and therefore lower their monthly mortgage bill. Keep in mind, just because you may be eligible for a lower rate, doesn’t necessarily mean it’s a good idea to refinance. You’ll have to consider the big picture and consult a mortgage professional to see if the cost of a refinance will be worth the overall savings.
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