Refinance your mortgage before record low rates disappear

Housing volatility could impact rates later this year. Here's why refinancing your mortgage now could be a smart money move. (iStock)

There’s little the COVID-19 outbreak hasn’t touched, but homeowners may find relief in the pandemic’s impact on home refinance prices and mortgage rates. Even homeowners who bought as recently as last year may benefit from refinancing their existing mortgage now. Low rates may not hold indefinitely; with uncertainty surrounding the end of the pandemic, the state of the economy, and businesses and schools reopening, those considering refinancing their mortgage loans should act sooner rather than later.

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As a first step, homeowners should educate themselves on how refinancing your home works. It's also important to compare rates and mortgage lenders via online tool such as Credible to run the numbers and see if a mortgage refinance makes financial sense (specifically, whether it can help lower your monthly payment).

Is now a good time to refinance your mortgage?

The short answer — yes. Since the start of the coronavirus pandemic in the U.S. in March, mortgage rates have dropped to the lowest seen since the 1970s. The Federal Reserve cut interest rates twice in 2020 in order to spur the economy during the height of the pandemic. Currently, according to Freddie Mac, the rates for a 30- and 15-year fixed-rate mortgage are as follows:

  • 30 year – 3.07 percent
  • 15 year – 2.56 percent

Mortgage rates since the 2008 recession have barely risen above 5 percent, so many recent homeowners already received the benefit of lower rates, but the math on refinancing now means homeowners can save even more if they’re willing to explore loan options. To see how much you could save, check out Credible now.

WHY IT'S A GOOD IDEA TO REFINANCE YOUR MORTGAGE WHILE RATES ARE LOW

For example, a home buyer purchases a $400,000 home in December 2018 at 4.64 percent on a 30-year loan. Those ready to refinance now to the current 30-year rate could cut their monthly payment down by $280 each month and save $51,000 over the life of the new home loan.

Those refinancing to a shorter-term home loan see even more savings. Using the $400,000 example above, if a homeowner with a 30-year loan refinanced to a 15-year mortgage, the monthly payment would increase nearly $700 due to the shorter time frame, but the homeowners would save over $197,000 in interest compared to the 30-year mortgage.

How dropping home values could make refinancing more expensive

The housing market moves slowly, but with predictions of the second wave of COVID-19 coming this fall and a spike in cases over the summer, homeowners could still see a drop in home values in the months to come.

Future housing market volatility is another reason homeowners should consider refinancing sooner rather than later. A drop in home value may make refinancing to the most competitive rates difficult as lenders use a property’s current market value in their loan-to-value ratio. A homeowner could still refinance even with a slight dip in home values, but this might mean missing out on current historically low mortgage rates.

HOW CORONAVIRUS IMPACTS YOUR HOME'S VALUE

Does it make sense to refinance your mortgage now?

Refinance rates also vary based on a homeowner's personal financial situation and credit score, but for those with strong credit and secure employment, the time may be right to take advantage of significant savings offered by refinancing. (Again, check out Credible for more information on current rates and how to compare your own numbers).

MORTGAGE RATES HIT A 'SWEET SPOT' — WHY IT'S THE PERFECT TIME TO REFINANCE

It costs money to refinance a home loan due to loan origination and lender fees, but for those who can refinance and “break-even” within a month or two of the new loan origination, a refinance may make financial sense, even after factoring in the costs of the new loan.

As states begin to reopen and the economy recovers, rates this low may not be seen again, making now the best time to obtain the lowest mortgage refinance rate possible.