Rushing to refinance: Why more consumers are looking to refinance in an uncertain market
May 1, 2020
We don’t yet know the full extent of the impact this pandemic will have on the housing market. However, according to a recent study conducted by Cultural Outreach, 73.8% of millennial homebuyers are more stressed about their overall finances since the onset of COVID-19. In one of the most volatile economic markets in history, people are grappling to find a new normal, and make smart financial decisions as they navigate through uncertain times.
Federal interest rates are low right now, and while mortgage interest rates are not directly tied to Fed decisions, the economic effects of the coronavirus pandemic are permeating most financial markets. As mortgage rates reach all-time lows, many homeowners are turning to refinancing their homes to save money. What are the benefits of refinancing in an economic crisis? How does it work in a volatile economy? We’ll answer those questions and more in this blog post!
Benefits of refinancing while rates are low
Historically low interest rates have resulted in a refinance boom in the mortgage industry. The Mortgage Bankers Association reported that the Refinance Index increased to the highest level since April 2009. Why are so many people refinancing their homes right now? In a volatile market, where things are changing daily, homeowners want to take advantage of a low interest rate when it becomes available. A mortgage rate reduction of even 1% could mean a savings of a few hundred dollars a month depending on the loan amount
Saving on your mortgage means more money in your pocket. If you’re facing financial struggles right now, refinancing could be a good option for you. Your home is most likely your biggest financial asset and can be a very useful resource in times of trouble.
If you have a lot of equity in your home and need cash to pay off something like high-interest debt or need funds due to COVID-19 related hardships, cash-out refinancing is another option. Read more about that in our recent blog on the topic.
A bigger picture benefit of refinancing is that it can restimulate the economy by increasing people’s spending power while they benefit from monthly savings on their mortgage payments. Of course, we are in a unique time where many people are getting financially hit as a result of the pandemic and don’t have disposable income and refinancing is more of an effort to take care of their families in a difficult financial time.
Even if you’re a recent homebuyer, refinancing is an option for you. You can still take advantage of lower interest rates, as long as you factor in the cost of new closing costs (see section below for more on that).
Things to think about when refinancing in an uncertain market
There are several things to think about if you’re considering refinancing your home right now.
1. How long do you plan on being in your home?
This will help you calculate the term length of your refinanced mortgage. Because you will be paying new closing costs with a home refinance, you want to make sure that you will be in your home long enough to recover those costs. For example, if your closing costs are $2,000, but you’re saving $200 per month with a refinance, as long as you plan to stay in your home for more than 10 months, it makes sense.
2. How much overall savings will you gain?
Work with a lender like us to calculate how much you will be saving with a refinanced mortgage, factor in closing costs, and decide if the savings is worth it for you. One of the downsides of refinancing is that you are losing equity due to the cost of the refinance, but you may determine the lower monthly payment is worth it.
3. Be smart with your new windfall
Be smart about your financial gains and consider using the monthly savings to help during this time of lowered economy or put the difference in an interest-bearing account to build up a 3-month emergency fund. Consider the pros and cons of using your savings to pay off short-term debt, like credit card debt.
Remember that refinancing your home is an extremely individualized process, and your unique circumstances will determine the need, terms, and outcome of your transaction. The market volatility may put pressure on you to make decisions quickly, but make sure you’re thinking rationally and considering what will be the best move long-term. Use our Refinance Calculator to see your potential savings. We’re here to help and want you to make the best decision for you and your family. So, reach out if you’re thinking about refinancing your home and we’ll see what works best for you.