Is it worth refinancing a mortgage during a pandemic: expert advice
As part of the economic fallout from the coronavirus pandemic, mortgage rates have reached the lowest levels in history, and refinancing applications are piling up - 3-4 times more than last year at the same time. Yahoo Finance.
If you have a home, a 30-year mortgage and you have come to the conclusion that you could benefit from refinancing, it might seem natural to decide to take another loan for 30 years. You’ll cut your monthly payment by perhaps hundreds of dollars, which is a great way to give your budget a break during this time of economic stress.
But in the process, you will increase your total costs - often substantially.
Personal financial expert Suze Orman says it’s wiser to switch to a 15-year loan. Other experts believe that reducing the loan term is not a reasonable idea, especially during the current crisis. The publication cites the arguments of both parties to help you decide whether 30-year or 15-year refinancing is the right choice.
Benefits of Refinancing into Another 30 Year Mortgage
If you replace the older 30-year fixed-rate mortgage with a new one, you will likely get a much lower mortgage rate and reduce your monthly housing costs.
30-year mortgage rates fell to an all-time low of 3,23%, mortgage company Freddie Mac said. A year ago, the average was 4,20%, and two years ago - 4,58%.
“The cost of borrowing has never been cheaper for homeowners,” says Grant Moon, founder and CEO of Home Captain Realty.
15-year mortgages with a fixed interest rate have even lower rates than 30-year loans: currently an average of 2,77% compared with 3,64% a year ago and 4,02% at that time in 2018.
But Moon says it's better to choose a 30-year mortgage for refinancing in the current conditions, because 15-year loans come with higher monthly payments.
“Your payment is likely to increase, and given the uncertainty in the economy, with 30 million people applying for unemployment benefits, it could be a dangerous proposition if the borrower loses his job and gets stuck on a higher payment amount,” he said.
Use the mortgage calculator and you will see that a 30-year mortgage of $ 250 with a fixed rate of 000% requires a monthly payment of $ 3,23. A mortgage loan of the same size for 1085 years at 15% has a higher monthly payment: about $ 2,77.
Benefits of Refinancing a 15-Year Mortgage
For borrowers who can handle higher repayments, 15-year mortgage refinancing has advantages, says Richard Pisnoy, director of Silver Fin Capital, a mortgage broker in Great Neck, New York.
“They will not only pay a lower interest rate on the loan, but they will also reduce the number of years on the loan, thereby saving a huge amount of interest,” says Pisnoy.
With the 15-year mortgage in the previous example — for $ 250 at an interest rate of 000% — the interest expense would be more than $ 2,77 over the life of the loan.
A 30-year mortgage with the same amount at 3,23% will cost much more: about $ 140 in percentage terms.
Suze Orman suggests considering the percentage burden for a hypothetical homeowner who has been paying a 30-year fixed-rate mortgage for 14 years.
“Now you decide to refinance and take on a new 30-year mortgage,” she writes on her blog. - Of course, the new mortgage will be at a lower interest rate, but you just extended the mortgage payment on this house to 44 years! This is 44 years of interest payments. "
But Home Captain Realty's Moon doubts that many homeowners are sitting on mortgages that are more than 10 years old.
“The US refinancing boom started in May last year, and many of those who were eligible for refinancing - or it made sense to them - had already refinanced,” he says.
Make your choice
Your decision on the term of the mortgage refinancing ultimately depends on how confident you are in your current financial situation.
“The borrower must compare the difference in monthly payments between 15- and 30-year fixed-rate mortgages to determine their own comfort level,” says Alan Rosenbaum, founder and CEO of GuardHill Financial Corp., a New York-based mortgage lender.
A 15-year mortgage has financial benefits, but they can be risky, says Pisnoy.
“The borrower needs to understand how a larger monthly payment will affect his cash flow and what financial impact it will have on him if he loses all of the monthly income he currently has,” he says.
If you refinance a mortgage loan for 15 years and the monthly payments become too large, you cannot simply send the loan payments again within 30 years.
If you are not going to stay in the house for a long time, you can take advantage of another 30-year mortgage and its lower monthly payments. If you move every few years, what does it matter for how many years you took a loan?
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