Why 2020 Is the Best Time to Refinance Your Mortgage Since 2013
Maybe you’ve heard someone declare ‘mortgage rates are at an all-time low!’ It’s been a fairly common refrain in the last few years as federal interest rates have fallen.
When mortgage rates are low, it’s a good time to get a first-time mortgage or to refinance a mortgage that you already have. If you think refinancing can save you money on your mortgage, then now might be the perfect time to look into it.
Why are mortgage rates so low?
Mortgage rates are currently at record-breaking lows due, in major part, to the extremely low Federal Reserve rate. The fed rate was dropped to near 0% in recent months in response to the economic hit from coronavirus, and during the most recent meeting of the Federal Open Markets Committee, committee members unanimously opted to keep the rate at between 0% to 0.25%, which is extremely low.
Per the FOMC’s statement on the decision, it kept interest rates low due to the “ongoing public health crisis, [which] will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”
While the Federal Reserve isn’t directly responsible for mortgage rates, the Fed rate is a signal that the economy is either booming or struggling, and other mortgage rates tend to follow suit. In this case, the 0% to 0.25% federal interest rate signals that it’s struggling, and other interest rates — including mortgages — dropped in response.
Rates for 30-year, fixed-rate conventional loans are now starting as low as 3.25% (as of June 25). Conventional 15-year fixed-rate loans are at 3%, and other mortgage rates are low, too — including rates on refinances.
You probably shouldn’t expect them to stay that low, though. With increased demand comes higher rates by lenders, so if you’re interested in getting a loan with a low rate, you’ll need to act quickly before demand pushes the rates higher again.
How refinancing could save you money
Refinancing can save you money in the long run. Many mortgages operate on decades-long terms. The two most common mortgage term lengths are 15 or 30 years. If you could save $200 a month on your mortgage for 30 years, would you want to? Refinancing might offer you just that kind of savings.
The most powerful part of refinancing is that it may lower both your monthly payments and your interest rate. If both those things happen, you could end up saving tens of thousands on your mortgage over the years.
You might be able to only change one aspect of your mortgage when refinancing. That means perhaps you only get a lower interest rate, or you only get a lower monthly payment amount. Each of those still represents overall savings, which means more money stays in your pocket.
Example #1: You bought your primary residence in 2016. You have $200,000 left on a 30-year mortgage at 5% interest, and your monthly payments are $1,060. At this rate, you would pay $181,639.74 in interest.
- Let’s say you secure a 15-year fixed-rate refinance loan with a 3% APR
- Your new total interest paid would now be $111,593.48, leaving you with $70,046.26 in savings
When you refinance to a shorter term, your payments do increase, rather than decrease. (This is because you have less time to pay off the balance.) However, with your interest rate cut in half, and your lending term cut in half, you pay significantly less in interest. Plus, you are mortgage-free in half the time.
Example #2: you have a $250,000 mortgage at 5% interest for 15 years
- You refinance for the same term, but lower your interest rate to 4%
- You save a total of $50.78 every month, amounting to $9,140.43 in total savings over 15 years
How to shop around for mortgage refinance quotes
Refinancing is done by mortgage lenders. There are several types of refinancing loans available, such as a cash-out refinance or switching from a variable-rate term to a fixed-rate term. Research which type of refinance option is best for you. Once you have a plan, shop around with at least three lenders. You will get different options with each one, and having options is always a good idea.
You can also get pre-qualified for refinancing. Pre-qualification determines your creditworthiness for new mortgage terms. Lenders will consider things like the amount left on your mortgage, your credit score and your payment history. Generally pre-qualification uses a soft pull on your credit score, which means your score isn’t affected by the inquiry and won’t go down.
Types of refinancing loans
Cash out refinance
A cash out refinance is when homeowners refinance for a larger amount than their original mortgage, and take the difference in cash. Essentially, they pull the equity they’re built via their mortgage payments or home value increases out of the house and take it in cash. However, the amount you take out is added into the new terms of the mortgage. Say you have a $400,000 mortgage and have $150,000 in equity, so you still owe $250,000. You can refinance and take $50,000 in cash from your equity, but then your new mortgage would be $300,000. This includes the $250,000 you owned plus the $50,000 you took in cash.
Refinancing from variable to fixed
This is another option that could offer powerful savings. Variable-rate mortgages change over time as the market changes. Fixed-rate mortgages are locked in at one rate. With current rates so low, fixed-rate refinancing might mean big savings.
A short refinance is an option for those possibly facing foreclosure. Your mortgage lender will pay off your current mortgage balance and you receive a new loan with lower monthly payments. This refinance option is not widely available, as it’s designed only for people who face losing their homes.
Take stock of your financial picture before making a decision about your refinance loan. A short refinance is a handy option for those who might be near financial disaster. A cash out refinance is attractive if you need the money for something like a home renovation or a family emergency. Otherwise, it’s probably better to leave the equity in your home.
Things to consider before refinancing your mortgage
- Rates: Mortgage rates can vary by state, so make sure you’re familiar with your state’s rates and not just the national average. Ask lenders what rates they can offer you.
- Fees: Refinancing comes with costs of its own, and different lenders will have a different set of fees. Ask for a clear breakdown of all the fees associated with refinancing.
- Details of the process: How long will the turnaround time be on getting your application approved and into processing? How does the lender communicate with people? These are some of the questions you should ask every lender you inquire with. Find someone whose style of work you enjoy and that works for you.
The final word
Refinancing takes time and money, and it needs to make financial sense in the long run. Before you go through the entire refinancing process, calculate how much money refinancing will save you in the long term. Look at your monthly payments and what you save in the long term. Shop around and find a lender that works for you and with whom you feel comfortable. You’ll be working closely with them for a while and you’ll want to make sure it’s an individual and a company that you like.
Begin your refinance journey by checking interest rates online. You can find 30-year mortgage rates from the Fed right here.