As mortgage interest rates continue to sit at a record low, more people are opting to refinance their current home loans to save money. These record lows, thanks to measures taken by the Federal Reserve as a precautionary measure against the effects of the coronavirus pandemic, could potentially help homeowners save thousands of dollars. If you’re retired and still owe money on your home, you may wonder if refinancing is a smart financial move.
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Before you make any decisions, we’ve compiled a list of four things you should think about that could help you decide if a refinance is right for you. Additionally, make sure to explore your mortgage loan options by visiting Credible to compare rates and lenders.
Here are four points to ponder if you're planning to refinance your mortgage in retirement.
4 reasons to refinance for retirees
1. Today’s low mortgage rates
The most crucial factor for anyone considering a mortgage refinance is the interest rates. At publication, the average rates were the following, per Freddie Mac:
- 30-year fixed-rate mortgage: 2.78%,
- 15-year fixed-rate mortgage: 2.32%
At this same time last year, the average 30-year fixed-rate mortgage was 3.69%, and the average 15-year fixed-rate mortgage was 3.13%.
With interest rates sitting at nearly a full percentage lower than last year, it could be an excellent time to refinance. Head to Credible to see today's refinance rates and determine if you could save money (and reduce your monthly payments) by pursuing new loan options.
If you haven’t refinanced in a while, you could see substantial savings. For example, at the same time, in 2005, the average interest rate for a 30-year fixed-rate mortgage was 6.36%, and the average 15-year fixed-rate mortgage had an interest rate of 5.89%. Homeowners who haven’t refinanced since 2005 could potentially save up more than 3.5%.
2. You can avoid a refinance fee
If you’re considering refinancing, you may want to act quickly. Beginning December 1, an adverse market fee of .5% will apply to all refinances with a loan amount higher than $125,000. This fee is in addition to fees your lender charge. The Federal Housing Finance Agency noted that the fee was to help offset projected COVID-19 losses.
To avoid paying this new fee, get started with your mortgage refinance via the multi-lender marketplace Credible today. With Credible's free online tools, you can complete the entire origination process from comparing mortgage rates up to closing. Start the process now.
As you’re researching your mortgage refinance, make sure to use an online mortgage refinance calculator to determine your potential new monthly costs with your new loan term.
3. You can maximize savings
Refinancing a loan can cost several thousand dollars, so knowing how long you plan to stay in the house could affect your decision about refinancing your mortgage. In many cases, you should plan to stay in your home for at least five years to maximize your savings.
If you plan to stay in the home long enough to recoup your losses or refinancing your home would allow you to eliminate private mortgage insurance, a home refinance may be a beneficial option.
If you're ready to refinance, use Credible to browse mortgage companies and compare loan rates without affecting your credit score.
4. You have a lot left on the loan
Another major factor you should consider is how long you have left on your current loan.
As interest rates continue to sit at record lows and will likely remain that way until 2023, refinancing a home loan becomes an enticing option for many homeowners. As a retiree, saving money on your mortgage payment could help you cover additional monthly expenses, but it could take you a few steps back in your goal to own your home outright.
You can also use Credible to research rates or connect with experienced lenders who can help answer more specific questions.
Make sure to use an online mortgage refinance calculator during your research to determine whether a refinance is a smart financial choice for your situation.
Remember to do the math
If you’re close to paying off your mortgage loan, however, a refinance may not make sense. Let’s crunch some sample numbers:
Let’s assume you purchased a home for $300,000 at a 4.5% interest rate on a 30-year fixed-rate mortgage and that you only have five years left to pay off your mortgage. Thanks to amortization, your monthly payments would be about $1,214.31 per month (with about $300 of that going towards interest), and you would still owe $80,318.11. The total interest you would pay over the last five years is about $9,362.
If you refinanced that $80,318.11 into a new loan, and your lender charges a 4% loan fee, your new total loan would be $83,530.83. If you refinanced that total into a 15-year-fixed-rate loan at 2.32%, your monthly payment would be $550 per month, but you would pay a total of $15,455 in interest.
While you would reduce your monthly payment by more than half, the total cost of your loan would also go up by about $6,000. If your overall goal is to save money, paying off your mortgage loan faster makes the most sense. If you need to reduce your monthly expenses, refinancing your loan could make more sense.
Additionally, if you can continue to make your standard payments with the lower monthly payment requirement, you could save a lot of money on the interest, making a refinance a smart option.