According to the Mortgage Bankers Association, refinance applications jumped 79% the week ending March 6, compared with the previous week. Even though mortgage rates have rebounded a bit since then, millions of homeowners could save money by refinancing.
Mortgage rates fell in February and into March, as COVID-19 spread beyond China and throughout the U.S.
The 30-year fixed fell to its lowest level since Freddie Mac began tracking rates in 1971. The Federal Reserve cut short-term interest rates to cushion the economic blow from the outbreak.
In many cases, homeowners refinance their mortgage to get a lower interest rate and lower monthly payments – basically, take out a new loan to replace your old one. You can also use a refinance to change the length of your mortgage.
Another good use for refinancing is to access your home’s equity; you can take advantage of cash-out refinances. These are low-interest loans that allow homeowners to borrow against their equity by replacing their existing mortgage with a new loan for a higher amount and receiving the balance in cash. It can be beneficial for people who want to make home improvements as the interest is tax-deductible.
Shortening the term of your loan can also save you a lot of money in interest, although your monthly payments may increase.
For Example, let’s say you’ve already made 10 years of payments on your original 30-year mortgage. In this case, you have at least three refinancing options:
- Refinance to a new 15-year mortgage: You’ll have a higher monthly payment, but you’ll pay the least in interest.
- Refinance to a new 20-year mortgage: If you qualify for a lower interest rate, you’ll have a lower monthly payment and will pay less interest overall.
- Refinance to a new 30-year mortgage: In most cases, you’ll have a significantly lower monthly payment, but pay the most overall in interest.
If saving on interest costs is your primary concern, then you’ll want to choose a loan with a similar or shorter term than what you have now. But if cash flow is your primary concern, a longer-term could really make sense.
Refinancing a mortgage can be a great way to reduce your interest costs, lower your monthly payment, or get your hands on some of your home’s equity. The key is to choose an experienced broker who can help you build the best plan.
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