The current state of the financial stock market has just about everyone in this country on edge.
People are nervous about the volatility of the market. No one seems to fully understand what kind of impacts the Coronavirus will have on the US Economy.
The Federal Reserve recently slashed its benchmark interest rate to near zero in the middle of March in an attempt to keep financial markets functioning and lending flowing to businesses and consumers.
This full percentage point cut is the largest drop since the financial crisis in 2008.
There is a silver lining if you are a home owner.
Mortgage Rates have dropped significantly as a result of the Federal Reserve interest rate cut and the 10-year Treasury bond yield, and this is why now is the best time to refinance your mortgage loan.
What Is a Mortgage Rate?
A mortgage rate is the rate of interest that the bank charges you for loaning you money so you can purchase or refinance your home.
The mortgage rate is primarily based upon how long you would be paying back the loan to your bank.
A 30-year loan is the most common and will have the highest rate, while 20-year, 15-year, and 10-year loans are also options to consider that will carry a slightly lower mortgage rate.
These fixed mortgage rates directly impact what your monthly payment will be. Since a 30-year loan is spread over a longer time, your monthly payments will be lower even though this carries with it a higher mortgage rate.
A 10-year loan is spread over a shorter period of time, so your monthly payment will be higher even though you will have a lower mortgage rate.
Current Mortgage Rates
Historically, over the past five years, mortgage rates have been really low.
Twenty years ago, the average mortgage rate was 7%. Ten year ago, the average rate was 5%. Over the past 5 years, the average mortgage rate has been a little over 4%.
Mortgage rates hit a low in 2016 when the 30 year rate was 3.43%, but they went up to as much as 4.86% just two year later. Since then, rates have fallen sharply to an average of 3.5% for a 30 year mortgage.
This current rate is pretty close to the lowest rate that we have ever seen.
This is why now is the best time to refinance your mortgage loan. The Mortgage Rates are so low, that you can be saving money on your monthly mortgage payment.
Things to Consider
In order to determine if you should refinance, you need to determine what your Break-Even Point is.
This is determined by finding the estimated cost to Refinance and calculating how long it will take to recoup those expenses.
There is a cost associated with Refinancing because you need to pay Closing Costs again. Mortgage Refinance Closing Costs typically range between 2% and 6% of your outstanding loan amount.
The national average closing cost for a refinance is around $3,500. There are multiple factors that affect the closing costs such as property taxes, loan amount, credit score, mortgage type, and the loan term.
Below is a list of estimated Closing Costs in order to Refinance
|Credit Report Fee||$40|
|Loan Application Fee||$300|
|Loan Underwriting Fee||1% of the Loan Amount|
- Title Insurance covers any ownership issues that come up on your property’s title for the duration of your loan.
- Credit Report Fee is required in order to cover the cost to pull a copy of your credit report and credit scores.
- Settlement Fee pays the title agent to oversee the closing process and verify that all of the paperwork is properly signed.
- Home Appraisal is needed by the bank because they need to know the home’s true market value before determining how much you can borrow.
- Loan Application Fee is required just to start the mortgage application process.
- Loan Underwriting Fee is required because banks charge this fee to create the loan and determine your ability to repay it.
Now that we have explained the Refinance Closing Cost, let’s look at an example to determine what your Break-Even Point is.
Let’s assume that you started with a $300,000 loan with a 30 year mortgage at a rate of 4.00%. Let’s also assume that after 5 years of payments, your loan is down to $260,000.
If you were to refinance and get a 25 year mortgage (in order to keep your mortgage payoff date the same), a refinanced mortgage interest rate of 3.5%, and estimated that your refinance costs will be the national average of $3,500, you will see some pretty immediate cost savings.
Your monthly payment will decrease by $181 per month, and it will take you only 19 months to reach your Break-Even Point.
This is where your monthly savings will start being more than the $3,500 in refinance closing costs. That leaves you with over 23 years of cost savings.
This example shows how much cost savings you will realize with only a 0.5% drop in the interest rate.
If the difference between your current rate and new rate will be greater that 0.5%, you will be saving even more money and reaching that break even point even quicker.
Zillow has a great refinance calculator here so you can enter your numbers to see how your monthly payments will decrease and what your Break-Even point will be.
Mortgage interest rates are near an all time low. If you plan on staying in your house for at least the next three years, it is an optimal time to look into refinancing your mortgage to lock in a lower rate.
Your Refinance Closing Costs will probably be offset within the next two years.
Take advantage of this opportunity with low mortage rates, and that is why now is the best time to refinance your mortgage loan.
Eugene is a Chemical Engineer with a passion for personal finance and is constantly learning new tricks to make his money work for him. He obtained an MBA part time and hasn’t stopped finding ways to make money, save money, and properly invest money. He currently lives at the Jersey Shore with my wife and two children.