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Mortgage Rates Are Down Due to COVID-19. Should You Refinance?


[Updated: Dec 28, 2020] Mar 25, 2020 by Maurie Backman
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As Americans grapple with the unpleasant realities COVID-19 has resulted in -- school closures, unemployment, job insecurity, and shortages of key supplies -- one silver lining is that the crisis has driven mortgage rates in a downward direction. As such, prospective homeowners are clamoring to apply for mortgages while current homeowners are rushing to take advantage of these competitive rates by refinancing.

In early March, the Mortgage Bankers Association reported that refinancing applications jumped 79% week over week. In fact, many lenders are turning down refinance requests for the time being due to the influx and ensuing backlog.

Still, there will likely come a point in the near future when you'll be able to move forward with a mortgage refinance. The question is: Is that the right move for you?

The benefits of refinancing

Refinancing allows you to swap an existing mortgage for a new one. When rates drop, you get an opportunity to lower your monthly mortgage payments without paying a lump sum toward the principal of your home loan. Refinancing also lets you change your mortgage terms so that if you're looking to pay off your home sooner, you can swap a 30-year mortgage for a 15-year loan -- and vice versa, if you're struggling with higher payments under a 15-year loan and want to switch to a 30-year loan. And if you have an adjustable rate mortgage, refinancing to a fixed loan with a competitive rate could save you from potentially higher costs down the line.

The disadvantages of refinancing

But refinancing also has its drawbacks. For one thing, there are closing costs associated with refinancing, just as there are when you finalize an original mortgage. As such, you'll need to make sure you intend to stay in your home long enough to recoup those upfront costs.

Imagine it costs you $3,000 to refinance, and in doing so, you lower your monthly mortgage payments by $150. At that point, you'll break even in 20 months -- meaning, what you pay upfront will end up being offset by savings in your monthly costs. But if you're only planning to stay in your home another year, refinancing won't make sense.

What about a cash-out refinance?

A cash-out refinance lets you swap your existing home loan for a new one that's more than your existing mortgage balance. That excess money is then yours to use as you see fit. With so many Americans facing the potential for lost wages in the coming weeks as COVID-19 continues to upend the economy, a cash-out refinance may seem tempting, as it could put money in your pocket to help you tackle some near-term essential expenses.

It's not a bad idea, but be careful -- a cash-out refinance could increase your monthly mortgage payment rather than lower it, leaving you with higher costs to grapple with during a period of economic uncertainty.

If you're thinking of refinancing your mortgage, make sure to shop around for the most competitive rates. Lowering your homeownership costs could very well be the one good thing that comes out of the COVID-19 crisis.

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