You may have read news articles this year about home mortgages and refinancing. According to CNBC, refinance demand jumped 105 percent annually as mortgage rates dropped to record lows in 2020. Rates have prompted many to consider and apply for refinancing, including us. Others are applying for mortgages for the first time. When considering whether our family should refinance, I checked out news articles and mortgage calculators to determine whether it was right for us in our situation.
First, there are many reasons homeowners choose to refinance. Some want to take cash out to pay for home renovation projects. Some want to lower their monthly payments. Others want to pay off their mortgage faster. Figuring out your why is the first step.
According to ConsumerFinance.gov, mortgage refinance is when you take out a new loan to pay off and replace your old loan. Common reasons to refinance are to lower the monthly interest rate, lower the mortgage payment, or to borrow additional money. When you refinance, you usually have to pay closing costs and fees. An important note: “If you refinance and get a lower monthly payment, make sure you understand how much of the reduction is from a lower interest rate and how much is because your loan term is longer.”
For us, one motivation is paying down our mortgage faster by paying less interest. If we decide to do it, we would still pay the same payment in order to pay down our mortgage faster. Others might want to renovate a part of their home, so taking part of the equity in cash might be more beneficial. These are important discussions to have with your partner, or yourself.
Taking cash out is not something we want to do. CNBC recently reported that others appear to feel the same way. “Cash-out deals made up just 27% of all mortgage refinances in the third quarter of this year, according to Black Knight, a mortgage technology and data provider. That is the lowest share in seven years.” Many of us remember the financial crisis of 2008 and don’t want to fall into a trap with our finances. No one wants to be left underwater on their mortgage! While we have been working on home projects like so many others during the pandemic and our increased time at home, we are using savings rather than credit or equity.
The other recent CNBC article I referenced above noted that “The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($510,400 or less) decreased to 2.85% from 2.90%, with points decreasing to 0.33 from 0.35 (including the origination fee) for loans with a 20% down payment.”
If this seems confusing to you, check the mortgage resources for consumers at ConsumerFinance.gov. It offers information such as the definition of an origination fee: “An origination fee is what the lender charges the borrower for making the mortgage loan. The origination fee may include processing the application, underwriting and funding the loan, and other administrative services. Origination fees generally can only increase under certain circumstances.”
Another resource is Mortgage Calculators. Whether you’re calculating the income you need to buy a home or whether refinancing makes sense. There is a home loan limit calculator that estimate the max amount that you can safely pay on your potential mortgage each month. For us, what was most relevant at the moment is the refinance calculator, which told us an estimate of our closing costs as well as how much our new monthly mortgage payment would be vs. our current payment.
Had we wanted to take cash out, we could also estimate our new loan payment, closing costs and interest costs. It’s all very eye-opening and gives us something to think about.
Having the right information on hand helps us make the most informed and best decision for our family.