Mortgage rates cratered in 2020 due to the COVID-19 pandemic. The Federal Reserve dropped interest rates to levels rarely seen before. Despite an economic downturn, mortgage applications increased to record numbers. A large number of these applications involved refinances, which are more popular than ever before. Rates continue to remain low this year and probably won’t recover in the short-term.
Borrowers Stand To Benefit From Refinancing
Refinancing comes with a variety of benefits for potential applicants. They stand to reduce their interest rate and even the duration of their loan. In simple terms, both results help borrowers save thousands of dollars. A refinance replaces an existing mortgage with a new mortgage, preferably with better terms. Borrowers would never want to refinance into worse terms for obvious reasons. From time to time, mortgage holders do refinance for the wrong reasons and suffer from the consequences.
Rewards and Benefits Not Guaranteed With A Refinance
Borrowers shouldn’t rush into a refinance blindly, though. Refinancing makes sense for many existing borrowers – not all of them. Therefore, caution and careful planning are required to succeed here. Certain guidelines prevent borrowers from making mistakes with a refinance. A few smart moves now can lead to significant savings later on. Nobody likes dealing with mortgages, but a better savings opportunity might not exist. With rates as low as they are now, most borrowers can find some benefits.
Consider the following reasons to refinance a mortgage in 2020 and beyond:
A Lower Interest Rate = Bigger Savings
Perhaps 2020 should be called the Year Of The Mortgage, other circumstances notwithstanding. Lower interest rates will always save borrowers money. Still, conventional wisdom states that a minimum interest rate reduction must be met. A refinance makes sense for a 1% interest rate reduction. Anything over a 2% reduction should be latched onto immediately. With such a reduction, monthly payments fall by hundreds of dollars and savings for the entire loan amount to thousands.
Turn A 30-Year Loan Into A 20-Year or Shorter Loan
Existing mortgage holders don’t always realize a refinance can lead to a shorter loan term. Since less interest builds up over time, a 30-year loan could turn into a 15- or 20-year loan due to lower rates. In the end, borrowers reap even further savings by reducing the total loan term. A borrower reaps immediate savings through this strategy, and they can compound said benefits by making higher monthly payments. It’s a simple tactic to save money, reduce the loan term, and save even more money.
Take Out Some Equity For Other Expenses
During the refinance process, homeowners can pull equity out of their property. Such funds can be utilized for any purpose imaginable. Many borrowers finance a new purchase or consolidate existing debt in order to compound the benefits. Borrowers should exercise caution in tapping equity, though. To avoid problems, they’ll need to responsibly use these funds to cut down debt rather than take on fresh debt. This particular benefit should be considered secondary to a lower rate or loan term.
Refinancing Requires A Sound Financial Plan
Borrowers may reap a variety of other benefits in refinancing. Nonetheless, the key to success involves formulating a sound financial plan. An individual cannot walk into a lender’s office and refinance their home without being strategic. A refinance that saves the borrower money provides greater financial flexibility moving forward. For that reason, nobody should rush into this process without a plan.
In the coming months, mortgage rates should remain low within a tight range. The Federal Reserve doesn’t intend to raise rates anytime soon. Consumers stand to reap the rewards of taking out a first time mortgage or refinancing an existing one. 2021 could prove a strong year for mortgage loans as well. Of course, only time will tell on that front, but 2020 offers many opportunities for borrowers. A carefully planned refinance can heap years-long benefits onto borrowers with a simple application process.