Mortgage rates make refinancing attractive today: 4 things to consider
While you were preoccupied with a plague and politics, mortgage rates fell and refinancing was booming. And the boom has plenty of room for expansion.
According to Black Knight, a mortgage analysis firm, nearly 18 million homeowners could cut the interest rate on their mortgage by 0.75% or more. That goes beyond the 3 million homeowners who refinanced in the first half of 2020.
Mortgage rates fell to record lows this summer and fall. The average interest rate for the 30-year fixed-rate mortgage has been below 3% since the beginning of September, according to NerdWallet daily rate survey.
Not sure if it’s time to refinance now? Soothe your confusion by asking yourself the following four questions.
1. What is my goal?
What do you hope to achieve through refinancing? The answer to that question is your goal. Identifying your target is the first step as it will point you to the right refinance loan.
Here are three common refinancing goals:
- To reduce the monthly payment. For this easy refinancing, apply for a loan of the same term – another 30 year loan if you have one.
- Pay less interest. If you refinance a 30 year mortgage into a shorter term loan, your monthly payments will likely be higher, but you will pay less interest over the life of the loan.
- Get cash. A Disbursement Refinancing allows you to borrow more than you currently owe and take the difference in cash. It’s a common way of paying for home renovations.
2. Is my destination within reach?
Once you have identified your goal, you need to find out if it is realistic. The right follow-up question will help.
If the goal is a lower monthly payment, how long will I stay at home?
The answer is important because when you refinance, you will lose money if you sell the home before you break even.
Here’s why: when you refinance, you pay hundreds (or thousands) of dollars in closing costs. You want to hold onto the loan until the savings exceed these costs. This often takes a few years. You can estimate your breakeven point by using Refinancing calculator from NerdWallet.
If the goal is to pay less interest, are the long-term savings worth the higher payment?
If you shorten the duration of the loan, you will likely get a higher monthly payment. What if you have a financial emergency? Can you still make the monthly payment?
When in doubt, it may be better to refinance for the same term as your current mortgage rather than a shorter one and pay an additional principal each month. You’ll still pay it out faster, but you can stop the extra payments if you run out of money.
If the goal is to get cash, do I have enough equity?
In most cases, you can borrow up to 80% of the value of your home. This means that if you currently owe 70% of the house value, you can pay off 10% of it.
Find the current value of your home and multiply it by 0.8. That’s roughly the amount you can borrow. Ask your lender how much you currently owe on the mortgage (or check for an up-to-date statement). You can pay off the difference between what you owe and 80% of the house value.
3. How will the new refinancing fee affect me?
The refinancing door remains despite a “adverse market refinancing fee”Imposed by Fannie Mae and Freddie Mac that effectively increases refinancing rates by about an eighth of a percentage point. The fee, while annoying, is too small to eliminate the savings most people would get from refinancing.
The negative market refinancing fee does not apply to every loan. It only applies to conventional mortgages. If you are refinancing on a jumbo loan or mortgage that is covered by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or Department of Agriculture (USDA), the fee will not be charged. These types of loans made up about a third of all mortgages in Q2 2020.
The other two-thirds of the mortgages were securitized by Fannie Mae and Freddie Mac, and the fee applies to those. There are a few exceptions: The fee is not applied to refinances of $ 125,000 or less, term loans, or HomeReady and Home Possible mortgages with income restrictions.
The fee is paid to Fannie and Freddie by the lender and will likely not appear on your credit assessment records. Instead, it will likely be included in your interest rate. A fee of 0.5% corresponds to an interest rate increase of approximately one eighth of a percentage point.
If you are refinancing to reduce your monthly payment, the negative market refinancing fee is a concern as the higher interest rate pushes the breakeven point back a few months.
If you refinance at short notice, the interest savings quickly overshadow the slightly higher interest rate.
And when you choose to do a withdrawal refi, the goal is to get cash, not save money. Therefore, the fee is irrelevant to your decision.
4. Can I achieve my goal in other ways?
Lowering your mortgage rate may feel humble, but there are other ways you can accomplish your goal if you are unable or unwilling to refinance.
- To cut your monthly house payment without refinancing, you can get cheaper homeowner insurance.
- To pay less interest over time without refinancing, you can pay an additional principal each month. This way, you would speed up the payment date and reduce the overall interest on the loan.
- Instead of making a withdrawal refinance, you can keep your mortgage and get a line of home equity or home equity loan instead. These loan products often have higher interest rates than you can get with a payout refi, but you have the option to repay them earlier than required.
Whether you are refinancing or not, the first step is figuring out your goal. Once this is established, you can be more confident in making the decision that is best for you.
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Holden Lewis is a writer at NerdWallet. Email: [email protected] Twitter: @HoldenL.
The article The Property Line: 4 Questions to Ask Before Refinancing originally appeared on NerdWallet.