In response to the Coronavirus crisis, the Fed has reduced rates to record lows. This reduction trickles through to many types of loans including consumer loans, credit cards, and mortgage interest rates. Have you checked your interest rates lately? It could be a great time to refinance your mortgage. Here’s how and why refinancing can save you money.
1 – Lower Interest Rates Mean Lower Monthly Payments
If the interest rate on your current mortgage is at least 0.75% higher than current market rates, it may make sense to refinance. There is always a cost to refinance, but you can typically recoup that cost in a short amount of time when the rate difference is 0.75% or more. Also, some lenders offer no closing cost options (at a slightly higher rate than loans with closing costs). You can compare these different options and select the one that makes the most sense for you.
As an example, let’s assume you have a mortgage balance of $400,000. With a 4.5% interest rate, your principal and interest payment (excluding taxes and insurance) would be $2,027. If rates are reduced to 3.5%, your payment would be $1,796,… a savings of $231/month. In one year, you would save $2,772. Over the 30-year life of the loan, you would save $83,160! If the cost to refinance your mortgage is $2,000 (just as an example), then you would recover that expense during the first year.
2 – Skip a Mortgage Payment
Refinancing allows you to have one month of no mortgage payment. Here’s how. Let’s assume you close on your new loan on May 15th.
May 1st – Pay the old mortgage company
May 15th – Refinance
July 1st – Pay New Mortgage Company
At closing, you will be charged interest for May 15th thru May 30th (and it will likely be rolled into your loan). Mortgage payments are always in arrears, so your July mortgage payment would cover the interest for the month of June. Thus, there is no payment due for June.
Refinancing Amid Coronavirus
There are a few things to be aware of amid the Coronavirus epidemic. It can be a great time to refinance your mortgage because of low-interest rates, but there are also some circumstances that may prevent a successful refinance. For instance, if your employer shut down operations and you are collecting unemployment or if you applied for a mortgage forbearance, then refinancing may not be possible. Contact your lender for information about current rates, different options available, and your personal circumstances. To be referred to a reputable local lender, feel free to contact us.