In case you haven’t read about it, heard about it or spotted it on a giant billboard alongside a highway near you: mortgage and refinancing rates are at record lows. This money-saving potential has inspired many people to purchase their first home — existing home sales just hit a 14-year high — and has been the motivation for millions of others to consider their refinancing options — refinancing is at the highest level since 2003. The numbers speak for themselves. In 2020, the average 30-year fixed mortgage rate fell from 3.86% down to 2.96%, where it still stands. So, what does all this mean for you? if your current interest rate is above 4%, it’s very likely you could negotiate a better deal — but you need to make your move sooner rather than later.
That’s because, historically, any recession usually means lower mortgage rates, but those rates tend to rise quickly when the economy recovers, according to Nicole Kubin, a personal financial advocate and the founder of Strategic Divorce Advisory, LLC. Currently, the Mortgage Bankers Association expects rates will start to tick up once vaccinations are widespread, likely beginning in the second half of 2021. “That said, if you are considering refinancing, I advise you to lock in these historically low rates with a 15 or 30-year fixed-rate mortgage or by refinancing now,” she suggests.
Here’s a look at everything you need to know about refinancing your mortgage this year, so you don’t end up leaving money on the table:
What does it mean to refinance your mortgage?
To put it simply, when you refinance your home, you take out a new mortgage and then use the proceeds to pay off your existing mortgage. It may sounds complicated, especially when you dive into the paperwork and fees involved, but it’s easier than getting a mortgage the first time around, and most importantly — you end up paying less in the long run. Saving money = good. There are three basic types of refinances, as defined by Jeanniey Walden, the chief innovation and marketing officer for DailyPay:
- Rate and term: This is the most basic refinance. You reset your interest rate and the term of your loan, which is the length of your mortgage.
- Cash-out: In a cash-out refinance, Walden explains you’re not only paying off your existing mortgage balance, you’re also taking cash out of the equity you’ve built in home to help with home renovations or other life goals.
- Financial life improvement: Maybe you could only put down 5% when you first bought. Maybe your credit score wasn’t great. Any of these factors could mean that you were required to take out mortgage insurance. But now, if you’ve improved your financial life (hence the name of this refinance) perhaps you can scrap that insurance policy, and refinance at a better rate.
The fees associated with refinancing your mortgage
Be wary of anyone who says refinancing your mortgage won’t cost anything out of pocket. That isn’t the case, and all homeowners should be aware of the cost associated with a refinancing process. Here are the fees to expect:
The origination fee
This is what the lender charges to originate the loan, and it’s what they use to pay everyone that works on the loan.
Kubin says property taxes will be one of your higher closing costs when refinancing and will vary significantly based on where you live and on your home’s value. The average cost is $2,000. As a rule, six-months of property tax is generally due at closing.
The application fee
Yep, you already made an application to buy your home the first go-’round, but now you’ll need to do it again. There’s an application fee for refinancing an existing mortgage, which typically costs about $75- $300.
The mortgage refinancing fee
Kubin warns the mortgage refinancing fee can be up to 1.5% of your mortgage, which can be quite costly. For example, a $200,000 mortgage balance with a 1.5% origination fee would add $3,000 to your closing costs.
The appraisal and survey fee
According to Kubin, if your home’s value has not been appraised recently, you may need to pay for an appraisal, which averages $175 to $350. The same is true for a survey fee, which verifies that your home and all its structures are where the title says they are.
You may also need to pay for an inspection, where a property inspector will evaluate things like your home’s water and sewage system. The cost averages $175 to $300.
A title search fee
Kubin says a title search fee is incurred where your lender searches for your home’s title to make sure you are the owner and check for any debts you may have on the house. This carries an average cost of $700 to 900.
It’s smart to hire an attorney to look over the documentation of your home’s closing, and they’ll charge a fee for their expertise. Some attorneys will charge a flat fee for this service, while others will charge per hour. Make sure you understand their rates before you agree to work with them.
If you’re going to stay in your property long-term, and you only plan to refinance once, you may want to take advantage of something called buydown points, wherein you pay an additional fee in order to secure a mortgage that’s below market rate. Jenna Holtz, a mortgage loan originator at Sovereign Lending Group says that buydown points are essentially an upfront investment in saving interest over the life of the loan. While the cost for this will vary depending on your lender, area of the country, and credit score, Holtz says a good rule of thumb for spending on buydown points is that you want your savings to cancel out your costs within five years or less.
Is it worth it?
These fees add up, but it can still be beneficial to refinance your home. Certified financial planner at the personal finance company, SoFi, Lauren Anastasio, suggests asking your lender for a ‘break-even’ analysis. “This will tell you how many months you’ll need to stay in your current home to recoup the costs associated with refinancing,” she explains. “For example, if you discover it will take 72 months to break even, you may decide refinancing just isn’t worth the cost.”
But if you intend to stay put for the foreseeable future and you decide it’s worth it, you’ll reap these rewards:
You’ll pay less every month and save more.
By refinancing, your monthly mortgage payment could go down by several hundred dollars. This will give you more money for your everyday expenses, for retirement, for fun — anything you choose. “Saving on your monthly mortgage payment allows borrowers to put that money in their savings account, put it in a college fund for their children, save for home improvements, or apply it back to the mortgage to pay the loan off faster,” Holtz continues. “Those savings could also be used to invest in your future, whether that be investing in stocks or buying another property, which is another benefit.”
You’ll pay off your home faster.
How come? You’re not giving as much cash to the lender. With a lower interest rate, more of your payment is going towards loan principal, rather than interest, Holtz explains.
You can change the term of your loan.
Though many are under the impression they should pay off their mortgage as soon as possible, Walden says some homeowners refinance after only a few years so they can extend the term of their loan. “This isn’t always a bad idea. If you can lower your rate, lower your payment, save on interest, and free up cash for other goals, it can be a great decision,” she continues. By the same token, some opt to shorten their term so they can pay off their mortgage sooner. “This could be a good move for those that want to time their mortgage payoff with retirement,” Walden says.
You can move from an adjustable-rate mortgage to a fixed-rate mortgage.
A few years ago, adjustable-rate mortgages were fairly compelling as the rates were considerably lower than fixed-rate mortgages, Walden says. “However, with interest rates at or near historic lows, fixed-rate loans are in line with adjustable-rate loans,” she shares. “It can be a very smart move to lock in these low rates for the entire term of the loan to avoid a possible rate increase in future under the adjustable-rate loan structure.”
You can get access to the equity in your home.
If you purchased your home many years ago in a neighborhood that was up-and-coming, and now it’s the place to be, you could benefit from the equity your home has earned. As Anastasio explains, if you’ve seen the value appreciate, you may be able to pursue a ‘cash-out refinance.’ “This allows you to borrow against the equity you’ve built up in your home and gives you the cash you may want for other things, like paying off credit card debt or financing a home renovation,” she explains.
MORE ON HERMONEY:
- Should You Prepay Your Mortgage?
- Yes, Renting Is Still Cheaper Than Buying, But Is It the Best Decision Long-Term?
- Looking To Refinance Your Mortgage? Here’s Everything You Need To Know
- HerMoney Podcast: Bonus Mailbag: Home Buying and Real Estate
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