Why you should consider a mortgage refi if you haven’t in the past year or two

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This Valentine’s Day, show yourself and your bank account some love by thinking about a mortgage refi if you’re still paying off an older loan that you haven’t overhauled recently. There are many good reasons to refinance now, and just think about how many candy hearts or bouquets of roses you’ll be able to get with all that extra money every month.

Why you should think about refinancing

Since the start of the coronavirus pandemic in the U.S. almost a year ago, mortgage rates have continually set new records and recently have been hovering around all-time lows. That means that anyone who opened a mortgage before March 2020 stands to save if they revamp their loan.

To underscore how significant the savings could be, look at the example of 15-year mortgages.

These shorter-term loans help borrowers save because they usually have lower interest rates than 30-year mortgages to begin with, and then compound that savings by paying the balance off in half the time.

However, those loans can be tough on household monthly budgets. Because they have to get paid off in half the time of a 30-year loan, they have higher payments for their duration, which makes them too expensive for many borrowers. Now though, thanks to low interest rates across the board, many 30-year mortgage holders have been able to refinance into 15-year mortgages while keeping their monthly payments the same.

On a $300,000 loan at current rates, borrowers with a 15-year mortgage will save around $100,000 in interest overall compared to those who have a 30-year loan, so the potential for savings is huge.

Where are rates headed?

Most experts say mortgage rates will start climbing again by the end of this year, but they will probably take a while to reach their pre-pandemic levels.

That means borrowers still have some time to benefit from the current rate trends, but the sooner you act, the better your chance of getting the absolute lowest rates. As the coronavirus situation stabilizes and the new administration gains steam — and passes COVID relief — it’s likely rates will start inching back up.

Even so, many industry watchers say it could be years before rates are above 4 percent again. However, as rates rise, the pool of people who stand to benefit from refinancing will keep getting smaller, so now is the peak for the maximum number of borrowers who could benefit from a refi.

Should anyone pass on refinancing?

Last year, a number of surveys by Bankrate and others found that as many as 20 million mortgage holders hadn’t refinanced, and as a result were missing out on potential savings. But just because all those borrowers could save doesn’t mean a refi would definitely be the best course of action for all of them.

Especially for borrowers nearing the payoff date for their higher-interest loans, a refi might not bring them enough savings to make the effort worth it.

It can also be difficult to refinance if you’ve had recent changes to your employment, credit or other finances.

When considering refinancing, it’s important to take stock of your full financial picture and figure out what overhauling your home loan will mean.

Are there any downsides to refinancing?

The biggest downsides to refinancing are all the paperwork involved and the closing costs. As a result of the pandemic, many lenders have made their processes more virtual, but you’ll still need to submit a pile of financial documentation to prove you can afford the new loan terms.

Closing costs are usually 2 to 5 percent of the loan’s total value. Most borrowers pay them up front, though they can be rolled into the loan’s principal balance, which means you’ll pay interest on that extra amount, too. These costs can be a barrier to some who don’t have the money, and also can change the calculation on whether or not it’s worth it to refinance.

If you’re considering revamping your loan, make sure to factor in the closing costs when you figure out how much you’ll save overall.

Bottom line

Mortgage rates aren’t going to stay at these all-time low levels forever. If you haven’t refinanced recently, now’s the time to look at your mortgage, crunch the numbers, and give serious consideration to updating your loan. Make sure your savings will overcome the upfront costs in a reasonable amount of time, and then enjoy the extra money in your pocket.

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Written by
Zach Wichter
Mortgage reporter
Zach Wichter is a mortgage reporter at Bankrate. He previously worked on the Business desk at The New York Times where he won a Loeb Award for breaking news, and covered aviation for The Points Guy.
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