Refinancing your mortgage in the middle of the coronavirus pandemic could be the best decision you’ll ever make. Already, thousands of people have refinanced and have put hundreds of dollars back into their pockets each month.
When times are tough, every dollar counts
Nobody expected the coronavirus pandemic to be so far-reaching and last more than a year. However, even after a year it’s still not over. States in the U.S. are struggling to reopen while some countries are going back into lockdown.
Boris Johnson announced a plan to end restrictions in England by June 21, 2021, but that’s still months away. While various governments figure out how to reopen, world economies are still struggling and so are citizens.
Whether you’re struggling financially or your regular income has been impacted by the pandemic, refinancing your mortgage can help you recover some of that lost cash.
- Interest rates are already rising
Interest rates are at an all-time low in many countries, including the United States and Australia. Australia has some of the lowest interest rates you’ll find, but those rates aren’t guaranteed to stick around for long.
Interest rates were dropped exceptionally low to entice people to refinance. Now, they’re still low, but they’re rising. The interest rates under 3% were artificial, and they’re not going to last.
- Refinancing will help you avoid bad loan decisions
You might be tempted to sell your home and buy another. There’s nothing wrong with that. However, you’ll need to take out a new mortgage and that’s where things can get a bit tricky.
Thanks to the devastation of the coronavirus pandemic, UK citizens are now able to get a 40-year fixed rate mortgage with a 10% minimum down payment. Borrowers who pay 10% down will pay 5.35% interest up to 40 years; paying 40% down will fix at 4.2%. That’s compared to the 2.99% interest on a 10-15-year loan with a 40% down payment.
These extended-term loans require paying a flat fee of £1,995. The good part is there are no early repayment fees, so you could pay the loan early. However, there’s a chance you might not want to repay the loan early.
If you’re trying to save money, this type of extended loan is a bad idea. You’ll end up paying far more interest over the course of 40 years. You’d be better off renting a flat with a friend.
Refinancing your mortgage will help you avoid being tempted by this kind of deal.
- Refinancing can help you eliminate mortgage insurance
If you’re tired of paying mortgage insurance, refinancing can help. Home values have gone way up in 2020 and refinancing could give you the 20% equity required to cancel your mortgage insurance.
Your mortgage insurance rate is affected by the following factors:
- The original amount of your loan
- Your credit score
If you had a low credit score when you bought your private mortgage insurance (PMI), you’re probably paying too much. For example, ValuePenguin crunched the numbers to demonstrate how a borrower with a score of 639 will pay four times as much as a borrower with a score of 760.
Refinancing could allow you to eliminate your PMI. However, if you still need to carry a policy and your credit score has improved, you can probably get a better rate.
- Government spending is increasing – inflation is here
All of the stimulus efforts and government programs designed to support and boost the economy are great on one hand, but have consequences for mortgages.
Many areas are already starting to experience inflation, which negatively affects mortgage rates. Inflation will increase as the economy recovers. Since many people have been deprived of their usual services for more than a year, releasing that pent-up demand will probably create even more inflation.
However, the biggest impact will come from bond prices. When governments increase spending through relief programs, bonds are issued to pay for the programs. Since mortgage rates are connected to bond prices, a market flooded with bonds causes bond prices to go down and interest rates rise.
The bonds that back mortgages are sensitive to inflation and lose value when inflation increases. When that happens, investors ditch mortgage-backed securities (MBS) and lenders have to offer higher yield rates to get them to come back. The lenders don’t want to absorb the cost, so they pass the cost onto mortgage consumers in the form of higher interest rates.
Refinance to lock in low rates while you can
Low interest rates won’t be around forever. If you’ve been thinking about refinancing, lock them in now before it’s too late.