4 reasons to refinance your mortgage when interest rates are down
- Fears over the coronavirus have sent markets and interest rates plummeting. And it's creating an excellent opportunity for anyone considering refinancing their mortgage.
- As of March 3, the average 30-year fixed mortgage interest rate was at 3.19%, down more than 1% over the past year.
- You can use mortgage refinancing to reduce interest, monthly payments, or private mortgage insurance costs.
- If you've been considering refinancing, now may be the time.
- Read more personal finance coverage.
Interest rates have plummeted over the past week, and it's created an opportunity for homeowners to take advantage of refinancing.
Concerns over the coronavirus outbreak have caused disruptions in the stock market, and eventually led the Fed to issue an emergency cut of the federal funds rate by .5% on Tuesday. While this cut doesn't directly affect mortgage interest rates - as they typically move in advance of the federal funds rate - these interest rates started to fall last week. Last Friday, interest rates on 30-year fixed mortgages hit to their lowest point since 2012, as Business Insider's Carmen Reinicke reported.
Rates are more than 1% lower than they were in March 2019, when the average interest rate sat at 4.6%, according to data from Mortgage News Daily. As of March 3, 2020, the 30-year fixed mortgage rate was 3.19%. These lower rates sent homeowners scrambling to refinance, creating a 26% increase in refinance applications last week.
If you've been considering refinancing your home, these lower interest rates could be an opportunity. Refinancing (which means replacing one loan with another) isn't always the right answer - if you've recently seen your credit score drop, or are planning on selling soon, it may not be right for you. Remember that refinancing essentially resets your loan's term, meaning you won't be mortgage-free for another 15 or 30 years.
If it is right for you, now might be the time to do it - here are four reasons why refinancing while rates are low could be useful.
1. You could lower your interest rate
Falling interest rates are an appealing reason to refinance your home today. Over the past few weeks, the 30-year fixed mortgage rate has fallen to its lowest point since 2012. These lower interest rates are an ideal opportunity to refinance and spend less in interest over the life of the loan.
The recent interest rate drops are likely to make refinancing worth it. Joe Tyrell, COO of mortgage software company Ellie Mae, previously told Business Insider contributor Tara Mastroeni, "A good rule of thumb is that if you're going to get at least half a percentage point reduction in rate, it might make sense for you to refinance."
With rates almost falling this much in recent weeks, it's worth looking into how much you could save on interest if you're unhappy with your current rate.
2. You could lower your monthly payment
Refinancing can lower your monthly payment in two ways: It re-distributes your remaining loan balance over another 15 or 30 years, and it can also lower your interest rate.
If your mortgage payment is high or your circumstances have changed since you bought your home, refinancing could help. Reducing your interest rate could lower your monthly payment, especially if you got your mortgage several years ago when interest rates were substantially higher. Refinancing can also help expedite private mortgage insurance removal, taking a bit more off your monthly payment.
3. You could refinance away private mortgage insurance
If you made less than a 20% down payment on your home, you likely pay private mortgage insurance each month. This extra fee, meant to help lenders protect themselves against losses when a borrower puts down a smaller down payment, costs somewhere between .3% and 1.2% of your home's value.
Your lender is required to remove private mortgage insurance once your loan-to-value ratio reaches 78%, but you can ask to remove it earlier, once your loan-to-value ratio reaches 80%. Refinancing could help you reach that mark sooner, especially if your home has gained a lot of value.
4. You could change your loan's terms
If you need to change the terms of your loan, like switching from a 30-year mortgage to a 15-year mortgage, refinancing can help. Additionally, you could change an adjustable-rate mortgage to a fixed-rate mortgage through refinancing.
If you've been considering refinancing for one of these reasons, now might be the time to explore it.
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