Refinancing Your Mortgage Could Lower Your Payments — Is Now the Time to Refi?

If you’ve had refinancing your mortgage on your mind, now may be the best time for you to refi. The economy and drops in mortgage rates are shaping refinancing into a pretty attractive option right now.

At the end of March 2020, refinances increased 26% within a week and had a spike of 168% compared to the same period the previous year, according to the Mortgage Bankers Association (MBA). Call it the teeter-totter effect — as mortgage refinance rates plummet, mortgage refinancing applications skyrocket.

More Numbers in Favor of Refinancing

As of early April 2020, Freddie Mac released results showing the average rate for a 30-year fixed mortgage declined to 3.33%, whereas in 2019 it was 4.08%. From Q2 until the end of 2020, the MBA forecasts that the average 30-year fixed-rate mortgage rate will fall from 3.6% to 3.5%, along with a projected $1.2 trillion total in mortgage refis (a 37% rise since 2019). It’s low mortgage rates like these that drive the refinance market!

The number of mortgage refi applications is outpacing the number of new mortgage applications as well; of all mortgage applications, refinances accounted for over 76% at one point in March. It’s evident that homeowners are in a mad dash to save more cash to cushion their finances.

The implications of these numbers is that a fast-growing number of borrowers have their eyes set on refinancing.

Mortgage Refinance, The Basics Explained

A simple definition of refinancing is getting a new mortgage to replace the existing mortgage. You may want to refinance because you’d like to:

  • Lower your monthly payments and interest rate because of a higher credit score
  • Shift from an adjustable rate mortgage (ARM) to one with a fixed rate
  • Shorten your term to pay off the loan more quickly and avoid paying more interest, or extend it for lower monthly payments
  • Take advantage of dropping rates due to this unprecedented economic climate

What types of refinancing are available? The Mortgage Reports goes into depth on the three types of refinance mortgages you can get:

  • Rate-and-term: A change of the mortgage rate, loan term or both
  • Cash-out: An increase in the amount borrowed, which gives you additional cash flow and safety net if you face lost wages
  • Cash-in: Pay more on your loan to secure a lower rate, shorter term or both

The benefits appear lucrative, and reports that according to Black Knight, a data and analytics solutions provider, about 9.4 million borrowers in America could save an average of $272/month by refinancing at a lower rate. Why wouldn’t you jump to take advantage of that kind of savings? Here’s what you should take into consideration before taking the mortgage refi plunge during a COVID-19-impacted economy.

Help Your Lender Help You

To help alleviate blockers in your refi process, be prepared and responsive as much as possible. Lenders are overwhelmed by demand, so you may experience delays. First, shop around, compare rates and commit to a single lender. If you’re trying to juggle multiple applications, you’re slowing down the process, which can turn you into a poor candidate. Next, gather all necessary paperwork, such as:

  • Tax returns, W-2 forms and/or pay stubs as proof of income
  • Copies of homeowners and title insurance
  • Proof of citizenship or U.S. residency status
  • Bank or brokerage statements to show assets, and other financial documents

Also, log every type of communication, including emails, phone conversations, letters, etc. These can help prove that you were doing your part to move the process along efficiently.

Savings Matter, But Costs Matter Too

As you calculate how much you’re going to save, keep in mind that you’ll have to pay refinancing fees. Typically, refinancing can cost 2–6% of your loan amount, depending on factors like your loan size, credit score and mortgage type and term. On average, refinance closing costs are $5,779 (taxes) or $3,344 (w/o taxes), according to real estate data and technology firm ClosingCorp.

LendingTree lists these fees to take into account:

  • Application: $75 – $500
  • Origination: Up to 1.5% of loan amount
  • Credit report: $30 – $50
  • Home appraisal: $300 – $400

Other fees may include flood certification, title search and insurance, recording and reconveyance, and legal/attorney fees as part of the overall cost to refinance. Keep in mind, if you have a good credit score and competitive rates on hand, you could have the leverage to negotiate some fees.

Final Tips and Good-To-Knows

Here’s what to consider as you weigh the pros and cons of refinancing:

  • Paying mortgage (or discount) points can help you save on your loan. This means you’re paying interest in advance to lock in a lower rate.
  • Refinancing is worthwhile if you plan to stay in your home long enough to see the savings. You can calculate your break-even point by dividing your closing costs by monthly interest savings — beyond that point you’ll start benefitting from the lower payment.
  • Repeatedly refinancing may cause more harm than good. By refinancing often, costs can negate the savings and you may end up paying more interest because of the loan extension.
  • Be intentional with your monthly savings. The goal is to lower your monthly payments, but have you thought about what you’ll do with your savings? During this economic uncertainty, you may want to be strategic about what to do with the extra cash in your pocket.

If you’re ready to start shopping for rates, or if you would like to move forward with Desert Financial, learn about our mortgage refinancing home solution. We’ll help answer any questions you may have after reading this article and can walk you through the process step-by-step!

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The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.