Coronavirus is not a joke. People are emptying store shelves to stock up on canned tuna, drinking water and toilet paper. Suddenly people are associating the current crisis with the Black Plague, Spanish Flu of 1918 and photos of empty shelves in Venezuelan supermarkets. The current crisis is real – and we may have to deal with it for a while. But what does it mean when it comes to being able to refinance your home?
If I were to name one relatively positive side-effect of the virus, it would be that interest rates have fallen by about 1 percent from the same time in 2019, mostly since the global outbreak. If you took out a mortgage loan at a higher rate in place beforehand, it may make sense to refinance. My previous blog “Should You Refinance?” addresses many questions or doubts you may have. Or you can call us at An Opportune, Inc., and we’d be happy to speak with you about your concerns.
Here’s the flip side of the issue, namely, that it doesn’t always make sense to refinance. Let’s consider a few scenarios.
You have only a few years left on your loan. Time to refinance?
There are many reasons that you may want or need to refinance your property. But refinancing to get a lower monthly payment that at the same time greatly extends the repayment term of your loan does not make sense in this scenario. Unless you customized the terms of your original loan, by refinancing you will start the clock all over again and will likely face another 30-year framework anew.
You are not planning to spend more than a few more years in your home
Most likely, there will be closing costs associated with refinancing your property. Therefore, you should consider when the break-even point would occur – when your refinancing starts saving money for you after closing costs have been covered. A typical refinance without any subsidies, such as lender’s credit, for example, costs about $2,000 in the Chicago area, sometimes more. So you would divide $2,000 by the monthly savings that refinancing would yield to determine how many months it will take to reach the break-even point to cover the expense of closing costs. If your break-even point is 36 months, for example, but you are planning to sell the property within that same three-year time frame, it makes no sense to spend money to refinance.
You are switching the term of your loan from 30 years to 15 years
Refinancing for a shorter term is always a great idea in theory, but it may not be practical if you are not certain about your income stream. How sure are you that you can meet the higher monthly payment that switching to a 15-year fixed would entail? Is your employment situation solid? Is some or most of your income based on commissions – and if so, do your commissions fluctuate with the seasons? Do you anticipate incurring any major expenses, such as the start of college-tuition payments or a buying a new car, in the next few years? These situations, among others, show that while switching from a 30-year fixed to a 15-year fixed makes sense in pure economic terms, it does not necessarily make sense across the board regardless of one’s individual financial situation.
You switch from a fixed-rate loan to an ARM (Adjustable-Rate Mortgage)
This type of refinancing makes sense only when you get a lower rate on an ARM and you plan to keep your property for a period that does not exceed the term of the ARM’s fixed option. For example, a 5/1 ARM, 7/1 ARM or 10/1 ARM means that the fixed term of the loan will not change for 5, 7 or 10 years, respectively.
There are many reasons to refinance and some reasons not to. It makes sense to educate yourself about the pros and cons of the process. At An Opportune, Inc., we will help you navigate through the myriad options available in the world of mortgage lending. Our expertise is second to none – so contact us when you’re considering whether or not to refinance.
And in all honesty, we would rather see higher interest rates and no coronavirus. But I digress.