With interest rates in decline, many people are wondering if they can save money on their monthly bills by refinancing their mortgage. In these uncertain times, the decision to refinance needs to be considered more carefully than ever. Find out if you can save money by refinancing in 2020.
Will Refinancing in 2020 Help You Save Money?
In order to answer this question, we need to consider three important variables. First, we’ll look at what the current market interest rates are like. Next, we’ll talk about your personal financial situation. Finally, we’ll wrap it up by examining other opportunities that the current health crisis has presented.
Current Interest Rates
By far, the most important variable in refinancing is to determine if you can actually shave interest points off your mortgage. On a $200,000, 30-year fixed-rate mortgage, a reduction of 1% should cut your monthly payment by around $100. If you’re looking to save money, start with your current interest rate.
If you, like many people, needed to refinance or get a new mortgage in the wake of the 2008 financial crisis, your interest rate can probably be reduced. At the time, the average mortgage rate for 30-year loans was between 5 and 7%! Even if your rate is currently in the 4% range, you might be able to save money by refinancing.
Today’s rates are, on average, below 4%, sitting at around 3.5% at the time of writing this article. Borrowers with excellent credit could even score rates below 3%!
Your Financial Situation
Remember that refinancing isn’t free. There will be additional closing costs, and the lender may also include some fees. As a result, it may take you a year or two to actually see a profit from your refinancing.
Can you afford the cost of refinancing right now? Considering that nearly half of all Americans have not saved enough to provide for 3 months of emergency expenses, you may want to prioritize savings first. Or be sure to look for a refi loan that has no out of pocket fees, where they roll the fees into the loan, but do the math and make sure that within a short time you achieve the savings you are looking for. The rule of thumb is if you can lower your interest rate by one point, then it can make sense to refinance as long as you are planning on staying in the home.
Capitalizing on the Coronavirus
Although the current coronavirus pandemic has led to a reduction in interest rates, that trend may not continue for long. How can you take advantage of the current situation?
Why Interest Rates Have Dropped
The federal government has made a strong effort to keep interest rates down since the start of the pandemic. The reasoning is that lower interest rates should encourage more economic activity and keep markets liquid. However, rates have not dropped much in the last month and have even increased slightly in the past weeks.
It’s unlikely that rates will slip much further, so now may be your best time to save money by refinancing.
As many people have lost their jobs, they have entered into forbearance agreements with their banks. These allow homeowners to suspend mortgage payments for a few months without penalty. But beware! These may limit your options later.
If you try to refinance after accepting one of these agreements, you may be out of luck. Most lenders want to see at least 12 months of consecutive, on-time payments before they will refinance you or grant another mortgage.
Potential Buying Opportunities
Depending on where you live and what options you have available, waiting to make a move could be a wise option. Undoubtedly, this crisis is going to lead to a small surge in foreclosures and people willing to sell their home below value. You might be able to find a great deal in the aftermath.
Many people who bought at the tail end of the 2008 financial crisis were able to acquire homes at prices far below their true value. They were rewarded when prices rebounded. If a similar pattern emerges in 2020, consider making a smarter purchase instead of refinancing.
For now, refinancing is certainly a great option if your existing loan has a relatively high interest rate. As long as you are in a stable position to do so, it will definitely help your bottom line. But keep your eye open for even more lucrative opportunities.