by Maurie Backman | April 13, 2020
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Homeowners have been clamoring to refinance. Should you do the same?
The COVID-19 crisis has been battering the U.S. economy for almost a month now, and many Americans are feeling the pain, homeowners included. In fact, many are reaching out to their lenders and asking to put their mortgages into forbearance, thereby pausing payments for a period of time as they attempt to stretch their limited income.
While the current economic climate isn't great, there may be one glimmer of positivity for homeowners looking to lower their housing costs on a long-term basis. Today's mortgage rates are extremely competitive, which means it may actually be a good time to refinance -- despite the general economic turmoil. The question is: Is refinancing a mortgage a smart move for you right now?
When you refinance a mortgage, you swap your existing home loan for a new one -- one with more favorable terms, which generally means a lower interest rate. That, in turn, could lower your monthly payments, making them more affordable -- and that's a good thing whether your income has taken a hit due to COVID-19 or not.
As of this writing, the average rate for a 30-year fixed mortgage is 3.25%. By comparison, the average rate over the past 52 weeks hit a high of 4.37% and a low of 3.13%, so as you can see, now's a pretty good time to lock in a decent rate. That said, mortgage rates can fluctuate from week to week, and even from day to day, so keep that in mind if you're refinancing. If you decide to go that route, be sure to shop around for the best mortgage rate.
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What's the one benefit of refinancing today? The relatively low rates we just talked about. But there's also a downside to refinancing: Just as you pay closing costs to finalize a regular mortgage, so too do closing costs apply when you refinance. As such, you'll need to make sure you plan to be in your home long enough to make refinancing worth it.
If you spend $2,400 on closing costs and, in doing so, shave $120 off the cost of your monthly mortgage payment, then you won't break even for 20 months. That's fine if you have no plans to sell your home for the next few years, but if you're expanding your family and expect to need a larger place sooner, then refinancing may not pay off.
Another thing: If you're going to refinance, you'll need to make sure you're in good shape to qualify. That means having strong credit and a steady source of income -- something many Americans, unfortunately, can't claim right now. Unemployment benefits aren't considered a steady source of income for mortgage application and refinancing purposes, so if you're out of a job and are receiving a weekly benefit, that won't help your case.
Also, prepare for what could be a drawn-out process. After mortgage lenders got overwhelmed with refinance applications in March, some are hitting the brakes on accepting new ones while they work through existing backlogs. If you're serious about refinancing, shopping around is your best bet. You'll probably need to exercise a fair amount of patience as well.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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