Mortgage refinancing is the process of paying off your existing mortgage with a new mortgage. You are essentially replacing the original loan with a new loan, typically at a lower interest rate. With news of lower mortgage rates becoming available in 2020 due to the impact of the coronavirus on the U.S. economy, refinancing is an option homeowners may want to consider to save money and reduce the lifetime cost of financing their home.
Record Low Fed Interest Rates
In early March 2020, the Federal Reserve (the Fed) made emergency cuts to the interest rate.
The federal funds rate is the interest rate at which banks borrow and lend excess reserves to one another on an overnight basis, therefore, influencing short-term rates on consumer loans.
At the beginning of 2020, the federal funds rate was 1.75%. After two rate cuts in early March, the rate now stands at 0.25%, which is the lowest it’s been since 2015.
Fed interest rate cuts often translate into reductions in mortgage rates. However, because of uncertainty related to the coronavirus, mortgage rates have remained volatile. After the uncertainty subsides, mortgage interest rates should decline, resulting in perhaps one of the best times to get a mortgage in recent history.
When is a Good Time to Refinance a Mortgage?
It may be a good time to refinance a mortgage if one or more of these are true:
- Refinancing reduces your mortgage interest rate by around 1% – 2%.
- Refinancing removes mortgage insurance.
- Refinancing lowers your mortgage payment.
- Refinancing shortens the term of your loan.
- Refinancing helps you build equity more quickly.
- Refinancing allows you to take cash out of your home.
- Refinancing allows you to get out of an undesirable mortgage, such as an ARM.
For example, refinancing a mortgage to a lower interest rate while also removing mortgage insurance can save a homeowner hundreds of dollars each month and several thousands of dollars over the term of the loan.
The breakeven point for a mortgage refinance is the point at which the savings from lower payments surpasses the fees paid to refinance the loan.
So, when considering whether you should refinance you want to know the interest rate, whether there will be mortgage insurance, and have a good idea of the fees (which usually run 2% – 5% of the loan’s principal). Some of the common fees to refinance can include appraisal fees, title fees, origination fees, recording fees, flood certification fees, and attorney fees.
For example, a homeowner refinances a 30-year mortgage and saves $200 per month on the payment. The fees are $3,600. Therefore, the breakeven point is 18 months.
Tips for Refinancing Your Mortgage
Often times, the best opportunities to get a mortgage at a low interest rate happen as a result of unforeseen circumstances, such as the 2020 coronavirus. Therefore, be prepared to refinance your mortgage on short notice.
Here are some suggestions:
- Make financial decisions that will keep your credit rating (FICO score) in the range of what you need to qualify for a mortgage.
- Update your financial documents and keep them organized, so you can quickly have them ready to refinance.
- Work with your mortgage broker early on, even when you are just thinking about refinancing, so you know how to position yourself to get the best mortgage and lowest interest rate.
Maintain Your Credit Rating
Maintaining a minimum credit rating to get a desirable mortgage is important to refinancing quickly.
Every decision you make regarding your credit is important, such as:
- Pulling credit reports and correcting mistakes.
- Paying bills on time.
- The balance you carry on credit accounts.
- The amount you pay on credit accounts.
- Applying for new credit.
- Closing credit accounts.
Marimark Mortgage is based in Tampa, Florida and helps homeowners refinance their mortgages in Florida, Virginia, and Pennsylvania.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.