Should you take advantage of low interest rates and refinance your mortgage? In this post, we’ll discuss the status of interest rates in the U.S., talk about what it means to refinance, and give you some tips to help you decide if refinancing is the right move for you. (Note: Although we look at the U.S. interest rates, the premise of this article holds true for Canadian readers as well)
What Does it Mean to Refinance?
Before we dive into refinancing in the current marketplace, let’s quickly review what it means to refinance a loan, specifically a mortgage loan.
Refinancing a loan is when a borrower, in this case, a homeowner, applies for a new loan with a different lender to replace their old loan (mortgage). Ideally, the new mortgage would have a lower interest rate or more favorable loan terms than their original one. If they’re approved, the new loan would be used to pay off the original one and the homeowner would be left to pay off their new mortgage according to the terms agreed upon.
Since interest rates are at record lows, many homeowners are looking at their options to refinance. But before you do so, it’s important to take a close look at your situation and the pros and cons of refinancing to make sure it’s the best decision for you.
The Current Status of Interest Rates
Over the course of just a few months, the average mortgage interest rates in the U.S. have plummeted to their lowest numbers since 2016. From 15 and 30-year fixed mortgages to 5/1 ARM APR mortgages, interest rates across the board are continuing to decrease.
|Date||Average 30-year fixed APR||Average 15-year fixed APR||Average 5/1 ARM APR|
|April 9, 2020||3.258%||2.794%||3.365%|
|April 8, 2020||3.389%||2.951%||3.582%|
|April 7, 2020||3.417%||3.015%||3.427%|
|April 6, 2020||3.419%||3.035%||3.453%|
|April 3, 2020||3.43%||2.943%||3.519%|
|April 2, 2020||3.60%||3.155%||3.57%|
|April 1, 2020||3.59%||3.262%||3.57%|
|March 31, 2020||3.573%||3.153%||3.577%|
|March 30, 2020||3.421%||3.091%||3.525%|
|March 27, 2020||3.438%||2.973%||3.818%|
|March 26, 2020||3.634%||3.067%||3.662%|
|March 25, 2020||3.292%||2.803%||3.311%|
|March 24, 2020||3.36%||2.812%||3.065%|
|March 23, 2020||3.651%||3.144%||3.22%|
|March 20, 2020||4.113%||3.522%||3.462%|
|March 19, 2020||3.798%||3.432%||3.459%|
|March 18, 2020||3.631%||3.16%||3.508%|
|March 17, 2020||3.559%||3.083%||3.409%|
|March 16, 2020||3.901%||3.299%||3.421%|
|March 13, 2020||3.767%||3.201%||3.342%|
|March 12, 2020||3.71%||3.181%||3.348%|
|March 11, 2020||3.606%||3.13%||3.295%|
|March 10, 2020||3.524%||3.074%||3.345%|
|March 9, 2020||3.332%||2.895%||3.379%|
When will rates rise again?
As the economy fluctuates throughout our circumstances, so will interest rates. So, when will they rise again? And what does that mean for your plans to refinance your mortgage?
According to a statement from the Federal Reserve Board, they do not plan to raise interest rates until the economy starts to stabilize. When that will actually happen is anyone’s guess, but if you’re considering a refinance, it’s important to keep an eye on your personal finances as well as economic indicators that could bump interest rates up.
Ultimately, a refinance could be in your best interest if the average interest rates are lower than what you’re currently paying. Before you decide to go through the refinancing process, consider the pros and cons first.
Refinance Your Mortgage – Pros and Cons
Like any major financial decision, refinancing your mortgage has several pros and cons that homeowners should be aware of, especially when it concerns such a valuable asset as your home. Here are a few of the potential benefits and drawbacks to refinancing your mortgage loan:
- Get a better interest rate and/or mortgage terms
- Lower monthly payments means more short-term access to cash
- You can put more money toward your principal balance
- Less money paid in interest overall improves the value of the investment
- Closing costs may outweigh the savings on interest
- Lose equity in your home by opening a new loan
- Refinancing could negatively impact your long-term net worth
3 Tips for Refinancing
1. Move quickly
While you can take economic indicators into consideration, truth is, no one can say what will happen to interest rates a few weeks or months down the road. If you’ve considered the pros and cons and are certain you want to go through with the refinancing process, you’ll want to act quickly.
Interest rates could accelerate with little notice, so time is of the essence if you want to secure the best rate possible.
2. Compare loan types
Refinancing is your opportunity to get a loan that better suits your needs and financial goals, so why not look into all of the options available? If you currently have a fixed mortgage with a high interest rate, it might make sense for you to refinance into an adjustable rate mortgage that has a history of lower rates. Or, if you need cash to make some repairs to your home, you might consider a cash-out refinance which gives you access to money upfront that you can pay off later.
3. Establish good credit
In addition to the Fed’s average rates, your personal finance history can also impact your eligibility for a better loan. Before you begin the refinance process, take a moment to conduct a credit check to ensure that your credit score is where it needs to be to qualify for a low interest mortgage.
Credit score requirements vary by lender and loan type, but the higher your score is, the better. Check with your lender to view their estimated interest rates based on your score.
If you choose to refinance while rates are low, use these tips to make sure you get the best possible outcome!
Also check up on the Best Mortgage Refinance Options based on in-depth reviews here.