Misled about mortgage forbearance? Consider mortgage refinancing instead

Mortgage forbearance can be a great option for Americans struggling to make their monthly payments but a mortgage refinance might actually make more sense. (iStock)

The coronavirus pandemic has taken a toll on many Americans’ finances. Between the financial hardship and high unemployment, many have found themselves either unable to or worried about making their mortgage payments. 

With the CARES Act in early 2020, the federal government made mortgage forbearance readily available with no penalties. Unfortunately, what seemed like much-needed relief at the time has turned into a burden for many homeowners.

A recent report from the Consumer Financial Protection Bureau found that some mortgage services engaged in behavior that caused or could have caused harm to consumers. That behavior included:

  • Providing incomplete or inaccurate information to consumers
  • Sending collections and default notices to borrowers enrolled in forbearance
  • Canceling or providing inaccurate information about automatic payments
  • Not processing forbearance requests in a timely way
  • Enrolling borrowers in automatic or unwanted forbearances

Unfortunately, these practices negatively impacted many families who were already struggling.


Mortgage forbearance vs. refinancing

With the sharp rise in unemployment during the pandemic, mortgage forbearance provided much-needed relief for many homeowners. And while mortgage forbearance can help to reduce your monthly payments for a short time, it’s not necessarily the right choice for everyone.

Those who still have a reliable income and can continue to make their monthly loan payment may find mortgage refinancing a more effective and long-term strategy.

Thanks to record-low interest rates, millions of homeowners have refinanced their mortgages over the past year, reducing their interest rates and saving tens of thousands of dollars over the life of their home loan.

Refinancing, rather than entering mortgage forbearance, has a more permanent positive impact on your finances. When you go into mortgage forbearance, you’re just postponing your payments. Interest accrues during forbearance and you ultimately end up paying back even more than you otherwise would have. But when you refinance, you actually reduce the amount you pay over the long run.

Visit Credible to see today’s interest rates and learn if you can save money on a mortgage refinance. You should also consider using an online mortgage refinance calculator to help you determine what your new monthly mortgage payments could be.


Benefits of mortgage refinancing

If you can still comfortably make your mortgage payments, there are some serious benefits to refinancing your home loan. Some of those benefits are:

  1. Lower interest rates
  2. Cash to put toward other expenses
  3. Faster loan payoff

1. Lower interest rates

Mortgage interest rates reached their lowest levels ever during the pandemic. As of April 15, refinance rates on a 30-year fixed-rate mortgage were as low as 3.000%. These loan rates can save homeowners tens of thousands of dollars over the life of their mortgage.

Imagine you had a 30-year fixed-rate mortgage for $300,000 with an interest rate of 3.5%. Over the entirety of the loan, you’d pay about $185,000 in interest. But if you refinanced your rate down to that 3.000 figure, you’d save nearly $30,000 on interest.

To see how much you could save on monthly payments today, crunch the numbers and compare loan rates and mortgage lenders using Credible's free online tool, all without impacting your credit score.


2. Cash to put toward other expenses

A cash-out refinance is a popular option to take advantage of low mortgage rates to free up cash flow for other purposes. When you do a cash-out refinance, you take out a new loan for more than your existing mortgage and then you receive the difference in cash.

People often use cash-out refinances to pay off other debt, pay for a home renovation or make another large purchase. The interest rate on your mortgage is significantly lower than the rate on other types of debt, meaning you’re saving yourself the higher interest costs.

An online marketplace like Credible can help you check out mortgage lenders and view refinance rates to help you decide whether a cash-out refinance is worth it.


3. Faster loan payoff

Refinancing to a lower interest rate can be an effective way of paying the mortgage off more quickly. Fifteen-year refinance loans usually come with considerably lower interest rates than their 30-year counterparts.

You might automatically assume the monthly payment on a 15-year mortgage is out of your budget. But with the added interest savings, you might be surprised to learn how affordable it can actually be.

Even if you don’t feel confident about your ability to pay off your mortgage in half the time, you can still refinance to a lower rate and use the interest savings to make extra payments.

Downsides of mortgage refinancing

A mortgage refinance can be an excellent way to lower your interest rate and free up extra money in your budget. But it’s not the right move for everyone.

When you refinance your mortgage, you’ll take on new closing costs, which are likely to cost thousands of dollars. If you only plan to stay in the home for a short time, you may not actually have time to enjoy the savings of your lower interest rate.

For example, if your refinance closing costs are $5,000, you’d have to stay in the home long enough to save at least $5,000 to make it worth it.

If you’re considering refinancing, visit Credible and get in touch with an experienced loan officer to get your mortgage refinance questions answered.


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