The ongoing pandemic has had a significant impact on mortgage and mortgage refinance rates, which sunk to historic lows after beginning their decline in March 2020 at the onset of the coronavirus. Interest rates for a 30-year mortgage currently hover around 3% while those for a 15-year mortgage are around 2.30%.
For homeowners interested in refinancing, now may be the time to start the process.
The following are the benefits and disadvantages to refinancing your mortgage loan:
1. Low interest rate. When it comes to interest rates, even a fraction of a percent can make a substantial difference. It may put money back in your pocket, or allow you to borrow a larger amount and take cash out while keeping your monthly payment relatively unchanged.
2. Cost savings. If you’re hoping to save money each month, refinancing at a lower interest rate will help you achieve that goal. For example, borrowing $200,000 at 3% for 30 years will cost $843 monthly – a total of $303,555 in principal and interest over the length of the loan. That same $200,000 at a rate of 3.5% percent will increase the monthly payment to $898, while the total cost surges to $323,312, for a difference of $19,757 over the life of the loan.
To determine new monthly payments based on your loan amount, use an online mortgage calculator.
3. Reduces the term of the loan. Switching from a 30-year mortgage to a 15-year allows you to pay off your loan faster. Personal finance expert Matt Hackett of Equity Now explains that 15-year mortgages carry lower interest rates, but the payment is significantly higher than a 30-year, due to the shorter amortization term.
“This is often a decision that a homeowner must wrestle with when refinancing,” he states. “If they have significant free cash flow and want to pay down their mortgage faster, then a 15-year may be the better option.”
1. Reducing the length of the loan term could result in a higher monthly payment. Do the math – you’re paying the same amount off but compressed into a shorter time period. That will lead to higher monthly payments. Review your monthly budget to determine if you can afford the boost in payments.
According to Freddie Mac, 15-year-fixed mortgage rates are currently hovering close to 2.4%, compared to approximately 3.00% for the 30-year term.
2. Rates are ticking up from 2020’s record lows. As noted above, mortgage interest rates are creeping higher. In fact, Freddie Mac expects them to continue their ascent and hover around 3.8% for the rest of 2021 as the economy recovers.
3. New adverse market refinance fee from the Federal Housing Finance Agency. A 0.5% “adverse market fee” went into effect in December 2020, dimming the benefits of mortgage refinancing. That fee had previously not been tacked on to mortgage refinancing, making now a slightly more expensive time to refinance versus April 2020. There are some exceptions to the fee, however, so be sure to check with your lender to see if you qualify.
While that half percent may not sound like a lot, as per the example above, it can add thousands to the ultimate cost of your loan.
Weigh the closing costs
Homeowners considering refinancing prepare for the costs that go with it. That includes fees for appraisal, title searches, and more. The fees can quickly add up.
If you’re not going to stay in your home long enough to offset these closing costs, refinancing may not be the best decision. Also: because your mortgage refinance will essentially pay off your old loan before your expected payoff date, check to make sure that your original lender doesn’t charge a prepayment penalty.
Have a finance-related question, but don’t know who to ask? Email The Credible Money Expert at email@example.com and your question might be answered by Credible in our Money Expert column