It can be hard to see the silver lining in the new normal that is being created by the growing concern about the global COVID-19 crisis.
The interest rates are at an all-time low, so now is a great time for refinance.
Continue reading to learn seven reasons refinancing may be a good idea, even if rates are low and you have very little time.
Interest Rates Nearly All-Time Low
Mortgage interest rates fell to an all time low of 3.29% in the week of March 5 for a 30-year fixed rate mortgage (30-Yr FRM). This is the lowest recorded rate since Freddie Mac started tracking mortgage rates in 1971.
Many homeowners took advantage of the low interest rates and refinanced as soon as they could. Mortgage companies temporarily raised rates to make it easier to process the backlog of applications for refinance. Rates are still very low at 3.65% for a 30-Yr FRM. This is well below the average rate of 4.25% for 2019.
Rates are expected to fall as mortgage companies clear the backlog.
To take advantage of low market rates, those who wish to refinance should apply immediately to avoid waiting too long. Refinance can lower your mortgage rate by up to 1-2%, reduce the amount of your monthly payments, increase your equity, and even make your home more affordable.
Reduce Monthly Payments to Allay Financial Stress
A handful of homeowners may be able to benefit from lower monthly payments in these tough economic times, as many businesses and industries are affected by COVID-19-related closings. Refinancing at rates that are likely to be 1-2% lower than the original mortgage rate can reduce your monthly payments by hundreds and still pay off your mortgage in the same time.
Reduce the term of your mortgage
If homeowners are able to afford their monthly payments to remain the same, refinances at a lower rate for a shorter term (e.g. switching from a 30-year FRM to a fifteen-year FRM) will help you pay off your house sooner and increase the equity in your home.
Refinances for a shorter term are a great way to reduce your mortgage debt. You can pay off your principal faster and thus lower the interest you pay. In times of economic uncertainty, having more equity in your house and being able to own your home provide financial security for your family.
Fixed-rate mortgages (FRMs), which lock in rates for the entire loan term, have adjustable-rate mortgages. Although there are many terms that could affect the way an ARM adjusts to market changes, most ARMs follow the market index. ARMs often start at low rates and then rise with the market or based upon other terms.
Refinancing from an FRM to an ARM can help reduce your monthly payments if you have ARMs with higher interest rates than current FRM rates. You can reduce uncertainty regarding future rate increases by switching to an FRM. Your rate will not change based on market conditions.
We know we told you to change from an ARM or FRM. But why not also look at the other option? Switching to an FRM from an ARM is a smart financial move for homeowners who aren’t planning to live in their home for longer than a few years. ARMs tend to fluctuate with market indexes so switching to an FRM instead of an ARM may make sense.
The homeowners will not have to worry about rising interest rates as they sell their home before the rates rise.
Solve Cash-Flow Problems
A variety of homeowners find it hard to keep up with their monthly expenses and bills during these tough economic times. Cash-out refinancing can be a way to increase your cash flow at a low interest rate. This will allow you to pay down your loan over time. You can take out cash from the difference to pay for other expenses.
A cash-out refinance is more advantageous than a credit card because the rates are usually lower and they remain fixed. However, you may be putting up your home as collateral for the loan. This could put your home at risk if you default.
A cash-out refinance is not right for everyone. However, it can relieve financial stress for people who need a quick cash injection but are confident that they will be able maintain the loan’s payments for the long term.
Get rid of Private Mortgage Insurance (PMI).
The current trend in realty is to pay less than 20% as an upfront payment. This allows homebuyers the opportunity to buy a much more expensive house than they might have been able to afford with a lower down-payment.
However, if the down payment is less than 20%, it may be necessary for the homebuyer take out private mortgage insurance (PMI), which can lead to higher monthly mortgage payments of hundreds of dollars.
Refinances can be used if your home’s value has increased significantly since your purchase or if you have paid off more than 20% of your principal loan. This will lock in a lower rate and eliminate your PMI payments. It’s a win/win situation.
Different mortgage products may be right for different homebuyers. Refinance options and reasons will vary depending on your personal circumstances. Refinance typically costs between 2-5% of the property’s principal value. Applicants must go through the mortgage approval process once again.
This is why you should seek the advice of a mortgage professional.
They can help you navigate the application process and have a deep understanding of mortgage products and programs.