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Mortgage rates continue to flirt with record lows, a sustained dip that means the window for refinancing your home loan remains wide open.
Rates declined again this week, when the average rate on 30-year mortgages fell to 3.03 percent from 3.04 percent last week. Rates hover just above their all-time low of 2.93 percent, according to Bankrate’s weekly survey of large lenders.
And yet millions of American homeowners have declined to lock in the super-low rates made available by the coronavirus pandemic. A recent Bankrate survey found three-quarters of U.S. homeowners had not yet refinanced their mortgages.
When Bankrate asked why homeowners hadn’t refinanced, respondents pointed to a variety of factors. One — that the homeowner planned to move soon or to otherwise pay off the mortgage — was a valid reason not to incur the expense of refinancing.
But the other objections didn’t stand up to scrutiny. Here’s the rundown and how to overcome the obstacles:
Objection 1: A refi won’t save you much money
Among homeowners who haven’t refinanced, the most-cited reason was that they wouldn’t save enough money to warrant a refi. That choice was named by 32 percent of respondents.
“You may want to rethink that,” says Greg McBride, Bankrate’s chief financial analyst. “Today’s rates are at levels unseen prior to last year.”
To illustrate one example, say you have a 30-year loan for $300,000 at 4 percent. Your monthly payment for principal and interest is $1,432. Refinancing to 3 percent would cut your monthly payment to $1,265, a savings of $167 a month or $2,004 a year.
Mortgage data firm Black Knight estimates 15 million American homeowners are in position to save by refinancing.
Objection 2: Closing costs and fees really add up
Closing costs and fees are the second most-frequently cited obstacle. Fully 27 percent of respondents named that as a reason not to refi.
It’s true — closing costs can run into thousands of dollars, typically 2 percent to 5 percent of the amount of the loan. However, if you can cut your rate significantly, you’ll recoup those closing costs. In the example above, those savings of $2,004 a year mean the refi would pay for itself in three to four years.
If closing costs have you feeling skittish, there is an alternative: A number of lenders market loans with no or low closing costs. The tradeoff is that you’ll pay a higher interest rate.
In one example, Third Federal Savings and Loan of Cleveland markets loans with closing costs of just $295 to homeowners throughout the country. That loan carried a 3.14 percent rate in one recent promotion for a 30-year fixed loan, compared with 2.79 percent for a standard loan in which the buyer pays the costs at closing.
To run through the numbers, borrowing $300,000 at 2.79 percent would mean a monthly payment of $1,231. Raising the rate to 3.14 percent would boost the payment to $1,278, an extra $47 a month. However, if the lower rate comes with $6,000 in closing costs, you’d need 10 years of lower payments to offset the closing costs.
Obstacle 3: The paperwork is a pain
Another common objection is that refinancing requires too much paperwork, a hurdle cited by 23 percent of those who have yet to refinance.
Yes, you will have to cobble together a pile of documents — including your most recent tax return and several months of pay stubs and bank statements. And you’ll probably have to unearth an old password or two or request a document along the way. However, the time commitment is likely to be annoying rather than daunting.
“Isn’t saving $30,000 over the next decade worth devoting a few hours of your time?” McBride asks.
Objection 4: My credit score is too low
Some 12 percent of respondents said their credit scores were too low to refinance. This hurdle is a bit of a head-scratcher. After all, timely mortgage payments are a surefire way to boost your credit score. And homeowners who were forced to miss mortgage payments because of the coronavirus recession have been allowed to skip monthly payments with no hit to their credit scores.
It is true that the best mortgage deals go to borrowers with credit scores of 740 or higher. If your score doesn’t fall in that range, try these tactics to boost your number:
- Pay your bills on time. Your payment history is the most important factor in your FICO score, so never pay bills late. Set up autopay or create reminders that let you know when your bills are due.
- Keep your credit utilization at 30 percent or below. In other words, if your credit card has a $10,000 limit, don’t run up more than $3,000 in charges.
- Don’t open a flurry of new accounts at once. New credit can hurt your score.
- Keep old credit accounts open. Don’t close those old accounts just because you no longer use them. Even dormant accounts extend the average length of your credit history.
- Monitor your credit reports. Dispute inaccuracies on your credit reports if you find them.