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Should You Refinance Your Home this Spring Due to Lower Interest Rates?

Buying a new house is usually exciting, and spring is a typical time for people to shop for them. This year, COVID-19 has changed the feel of home buying, and most people who can wait will probably do so.

However, with COVID-19 has come a drop in interest rates, something current homeowners may want to think about. When interest rates are low, you’ve probably read about many people refinancing their homes. Indeed, it’s a good time to consider whether refinancing will work for your home and give you a lower monthly mortgage. But just because interest rates are low doesn’t mean it’s going to benefit everyone.


What is refinancing?

Refinancing means you’re paying off your existing mortgage and replacing it with a new one. It’s a new agreement. People refinance to change the terms of the agreement. They might do this to:

  • get a lower interest rate
  • consolidate debt
  • shorten the term (length) of the mortgage
  • convert from adjustable-rate mortgage (ARM) to fixed-rate (or vice versa)
  • access home equity for a project or financial emergency


Should You Refinance?

Financial experts often say the rule is to refinance if you can lower your interest rate by at least 2 percent. If your refinancing goal is to lower your interest rate, you should at least take a look at the rate you’re paying now and what rates you might get. Even if the federal rate is zero percent, that’s not the interest rate you’d pay on a mortgage.

You also need to consider the cost of changing your mortgage. You’ll still need to pay for an appraisal, title search, application fees, a lawyer, and more. You can use a refinancing calculator to see whether refinancing will save you money over time.


Refinancing for Home Equity

In tough economic times, you’re more apt to consider refinancing if you need some extra cash. This “cash-out” approach can give you a chunk of money to cover your bills while unemployed. However, there are downsides to this, too. Again, you’re still paying the extra closing costs of your new mortgage.

Calculate the break-even point to determine how long it will take you to actually save. For example, if your new mortgage saves you $185 per month, but your closing costs are $3,000, you won’t break even for more than 16 months. ($3,000/$185) If you’re planning to sell before that time, refinancing is not a good idea.

Also, it will take at least a month to get your mortgage refinanced, especially now, with so many people applying to do so. Finally, your home’s value may not be what it was even a few months ago. Overestimating the value of the home, and therefore your equity is one of the big mistakes people make when refinancing.


If you’re debating whether to refinance, we’re happy to consult with you about it. Please contact us for more information.

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