Mortgage Refinancing: Is Now the Right Time?

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We’re all being inundated by disturbing news about the coronavirus. But tucked in between the heart-wrenching stories of families dealing with loss and separation and medical workers lacking critical supplies, you may have heard more than a few commercials for home mortgages. Mortgage lenders and mortgage marketplace services are all but giddy touting the historically low mortgage rates we’re seeing in recent weeks. And while there have been a few hiccups—for example, lenders temporarily suspending acceptance of new applications, simply because they were overwhelmed by sudden rush—the opportunity to save money on a mortgage is still within reach.

If you already have a mortgage, perhaps you’ve been tempted to look into refinancing your home loan. The opportunity to lock in a low rate for the remainder of your loan may be very attractive. Or perhaps you are coping with a recent job loss or reduced working hours due to the economic upheaval that has accompanied the pandemic and you’re trying to bring your monthly expenses down. These are two sets of circumstances when mortgage refinance might make sense for some homeowners. Does it make sense for you? Let’s take a look at some of the questions you should ask yourself before you decide.

What are my goals for refinancing?

Try to be very specific when you answer this question. For example, are you aiming for the highest short-term savings to get you past a temporary cash-flow challenge? Or are you trying to reduce the lifetime cost of your loan? Your answer to that question might determine whether you select a fixed-rate or variable-rate mortgage.

What is my tolerance for risk?

Variable-rate mortgages often offer lower rates than fixed-rate mortgages. But your savings may be short-term since your rate will change after an initial period of typically three years. If your goal is to save money in the short term, a variable-rate mortgage might be for you. That’s if you’re prepared to live with the uncertainty of a rate change. A variable-rate mortgage may also suit you if you don’t plan on staying in your home for very long.

Conversely, if you plan on staying in your home for a long time and want to lower the lifetime cost of your loan, now might be the time to lock in a low rate currently available. Your principal and interest payments will remain constant for as long as you own your home, which can make budgeting easier and bring you greater peace of mind.

Are there any fees associated with refinancing?

Bear in mind that when you refinance your home, you are taking out a new mortgage. You will have to pay many of the same upfront fees you paid when you took out your original mortgage. These include origination, appraisal, closing fees, and more. If managing cash flow is your primary concern and short-term savings is your goal, refinancing now could just exacerbate your problems. On the other hand, if you intend to keep your home for a long time and can absorb these upfront costs in exchange for lower lifetime homeownership costs, refinancing might be a good move for you. Experts recommend that you set a break-even point of two years when comparing your projected savings to the expense of taking out a new mortgage. If you don’t plan on staying in your home, refinancing could actually wind up costing you more than sticking with your current mortgage.

What else can I do to reap more savings from refinancing?

You may be wowed by the exceptionally low rates being advertised by mortgage lenders and, indeed, there are some great deals out there. But the best rates lenders have to offer are reserved for people who demonstrate financial strength. Your credit score is one important factor that governs what rate you’ll be offered. Download your free credit report before you submit a refinancing application. Look for any mistakes—they are surprisingly common—that may be bringing your score down and have them corrected. And try to pay down any high-interest credit card balances. Monitoring your credit is good financial hygiene any day of the year. But world circumstances make it more imperative than ever.
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