As the news about COVID-19 spreads, so does the fear of how it will impact the economy. In response, the U.S. Federal Reserve recently lowered interest rates.
What does this mean if you have a mortgage? That you can cash in on the lower rates by refinancing and saving more money each month.
Rates dropped earlier this year, triggering the highest volume of refinanced loans since 2013 in February. By refinancing at that time, the average homeowner could save around $250 per month on their mortgage. Now that the rates are even lower, you can expect more of the same activity.
How can you get in on the act to start saving yourself? Talk to a lender to see what rates you qualify for. You may be surprised at what they tell you.
As for making the decision to refinance, there are some things to take into consideration before pulling the trigger. Here they are:
Your Future Plans
It doesn’t make much sense to refinance your mortgage if you don’t plan on staying in your home much longer.
There are fees associated with new loans that can cost you thousands of dollars. To offset these fees, you want to keep your loan long enough for the savings to exceed them.
If you plan on moving to another home in the next five years, you may save more money by sticking to your existing mortgage due to the fees involved.
The Potential Savings
There’s no point in going through the work of refinancing if it won’t net you significant savings. As a general rule, most say that the new interest rate must be 50 basis points lower than the one you currently have.
Keeping this in mind, it’s crucial to comparison shop for the best rates, so you get the best deal. If you only look at the average rates that Freddie Mac reports, for example, you may miss out on lower ones offered by lenders.
While lenders compete on interest rates, they also compete on closing costs. By comparison shopping, you can see which lender offers the best combination of a low interest rate and closing costs so you can see how much you’ll actually save by refinancing.
Your Current Financial Situation
You may have done your homework and have the urge to refinance, but your current financial situation could be standing in the way.
According to LendingTree, one-fourth of mortgage refinance applications are denied due to poor credit or having a high debt-to-income ratio.
If you know that your credit isn’t at its best right now, you may want to take steps to increase your chances of having your application approved.
You could do this by paying down debts besides your mortgage, or by checking your free credit report to remove any existing errors that are hurting your score.
Refinancing makes sense when you can avoid costly mortgage insurance. You’ll have to pay mortgage insurance if you put less than a 20 percent down payment on a conventional loan or you have an FHA loan.
If you’ve reached the point where you have at least 20 percent equity in your home, refinancing can help since you can skip mortgage insurance. This can boost your savings and make the refinance worthwhile, even if the new rate isn’t 50 basis points below the old one.