As Covid-19 disrupts our day-to-day lives and roils financial markets, many homeowners are asking if now is the right time to refinance and if mortgage rates are headed lower.
Regarding where rates are heading, it’s important to remember that it is impossible to time any financial market. Look no further for proof than the recent downturns in the stock market that has caught many investors off-guard and sent shockwaves through the global economy. What we do know for certain is that mortgage interest rates are near all-time lows.
That's why we advise homeowners to first evaluate the savings that come from refinancing at today's rates, instead of trying to time the market perfectly. While it can be tempting to wait for rates to drop even lower, by doing so you are effectively trading a potential future economic benefit for a guaranteed, compounding economic benefit that comes from lowering your monthly payment sooner. The longer you wait for rates to drop, the longer you stay at your current higher rate, missing out on weeks or months of savings. And if rates rise, instead of fall, you may miss the opportunity to refinance altogether.
Here’s a framework to help you evaluate whether now is the right time to refinance:
The time to refinance is now if…
- The monthly payment savings is meaningful to you. If refinancing could save you $50 per month and you could use the savings to pay off more expensive debt such as credit cards or student loans, would that substantially impact your life? Would an extra $50 give you helpful breathing room in these uncertain times? If the answer is yes, it makes sense to refinance at today’s low rates.
- You can drop your rate by 0.25% or more. Lowering your interest rate by 0.25% can result in substantial savings, especially if your lender offers a credit to offset your closing costs. Moreover, if you have an opportunity to lower your rate by more than 0.25%, but you are required to pay closing costs, you may want to consider that too given today’s historically low rates. Your advisor can help you understand the cost-benefit analysis for your unique scenario.
- You have equity in your property and you would like to take cash out. Many borrowers are looking for ways to increase cash balances in this time of uncertainty. Americans are sitting on record amounts of home equity (value created by an increase in property value, a paydown of mortgage principal, or both). If you have a use for this equity, now may be the time to act as low rates make the additional interest cost of borrowing against your equity more reasonable.
You’re better off waiting to refinance if...
- Your monthly payment savings will be negligible. The savings associated with refinancing your loan should have a meaningful impact on your financial well-being. If refinancing will not provide such an impact, it make sense to hold off, especially if refinancing will reset the amortization period and end up costing you more in interest payments over the long run.
- You’re planning to sell your home and relocate. If you have plans to sell your home and the only way you are able to achieve meaningful savings from a refinance is to pay closing costs, it is best to stay in your existing mortgage. When paying closing costs, you need to be certain that you’ll be in the new mortgage for a long enough time for the savings to exceed the upfront cost to refinance.
How we help homeowners navigate uncertainty
We started Own Up to empower homeowners with personalized data and unbiased advice so they can make the best financial decisions for their unique situation. Our technology lets customers anonymously compare firm, custom rate quotes and total costs across a variety of mortgage products and lenders, while our expert Home Advisors serve as unbiased advocates to answer questions and help explore each option.
Our uniquely transparent business model is in perfect alignment with the customer, so we are only incentivized to act in your best interest, not ours. We give customers honest, expert advice – whether that means choosing a refinancing option from one of our certified lenders, going with a lender outside of our marketplace, or holding off on refinancing altogether. Our service is free to use, there are no obligations, and we keep your personal information completely confidential, so you don’t have to worry about a barrage of sales calls and emails from lenders trying to get your business.
If you've had a consult with a home advisor in the past and you want to reconnect, email us at firstname.lastname@example.org to schedule a no-pressure call to discuss the historically low rate landscape and if refinancing makes sense for you.
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