May 18, 2020

Edited 12/30/20

Historic Low Mortgage Refinance Rates Continue

Homeowners can save over $100K over the life of their 30-year mortgage by refinancing today.

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Historically low mortgage rates continue to bring an opportunity for homeowners to refinance their mortgage rates. As millions collect unemployment and businesses start to re-open, many are still left with accruing debt. Homeowners can lessen their financial burden by comparing mortgage refinance rates to reduce monthly expenses. 

The 10-year treasury rate that most mortgage loans are tied to has dropped to levels that are unprecedented. This, in turn, has put downward pressure on mortgage loan rates across the board.

Why Refinancing Now Makes Sense

On March 3, 2020, the Federal Reserve made an emergency rate cut that gave mortgagors a rare opportunity to refinance at historic low rates. For the last 5 weeks, mortgage rates have remained at these historically low rates.

How much can borrowers save?

The average rate of a 30-year mortgage is 3.26%, and 2.73% for a 15-year mortgage. One year ago, in 2019, the average 30-year mortgage rate was 4.25%. To put this in perspective for a $500K mortgage, borrowers can save $284 a month, $3,408 a year, and $102,121 over the life of your mortgage. 

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Refinancing benefits retirement planning

This opportunity is especially relevant for those living in or near retirement. A lower rate can significantly reduce monthly mortgage payments for the term of the mortgage. If you’re looking to be mortgage-free faster, refinancing to a shorter-term mortgage (i.e. moving from 30-year to 15-year mortgage) enables you to do so. In both scenarios, this means saving thousands of dollars in interest charges over the lifetime of your loan.

Refinancing to Lower Your Payment

Housing expenses are considered a fixed expense with little opportunity to lower it. However, refinancing your home can reduce your monthly payments and lower your fixed expense. A portion of every monthly mortgage payment goes towards interest charges. If those charges are reduced due to a lower rate, then your monthly mortgage payment will likely go down. 

Those considering downsizing to reduce monthly expenses now have a new option. Due to the lower rates, you could stay in your current home without breaking your budget. However, this strategy extends the amount of time before you pay off your loan. 

For example, you have 25 years remaining on a 30-year loan. If you refinance with a new loan and term, you could be extending another 30 years. This is in addition to the 5 years you’ve already contributed before your mortgage is paid off.

Refinancing to Reduce Your Loan Term

If you have good cash flow, then refinancing to lower your payment may not be attractive to you. However, reducing the length of your mortgage is motivating. When you originally purchased your home, you may have utilized a 30-year mortgage to keep your payments in line with your cash flow. Now, the low rates bring the opportunity to keep your payment at or near current levels while reducing the number of years on your loan. The most common move is from a 30-year to a 15-year term but there are other options available too. For example, moving to a 20-year or another term will allow you to keep your payments at their current level while shaving off years from your loan.

Refinance for Additional Borrowing

Lower rates benefit homeowners looking to use home equity to finance other expenditures. Perhaps you have much-needed repairs or improvements to your home. A refinance gives you the opportunity to borrow some of your home equity and spread the repayment over the life of the mortgage. In addition, you may find this strategy useful to pay off other high-interest debts, such as credit cards or personal loans. As you would with any other loan, you should only borrow the amount of equity you need.

Compare Rates and Be Organized

Before reaching out to your lender, make sure you’re getting the best rate possible by comparing refinance rates across multiple lenders. By doing so, you can see what other lenders are changing to help you save the most money. 

If you are considering refinancing your mortgage rates, you will need to present documents, such as pay stubs and tax returns, so be sure to get those documents together early on in the application process.

Keep in mind that refinancing does come at a cost. Costs may include closing costs, surveys, appraisals, document fees, origination fees, and any additional fees added by the lender. If you are planning to sell your home in the near future or already have a competitive rate, it may not be to your advantage to refinance.

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