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 their lowest levels in history, and refinance applications are piling up—three to four times higher than last year at this time, he writes. Yahoo Finance.

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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'll increase your overall costs—often significantly.

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 a record low of 3,23%, mortgage company Freddie Mac said. A year ago the average was 4,20%, and two years ago it was 4,58%.

“Borrowing costs have 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 will likely increase, and given the uncertainty in the economy with 30 million people filing for unemployment benefits, this could be a dangerous proposition if the borrower loses their job and is stuck with 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.

“Not only will they 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,” Pisnoy says.

With the 15-year mortgage in the previous example—worth $250 with an interest rate of 000%—interest costs 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 out a new 30-year mortgage,” she writes in her blog. — Of course, the new mortgage will have a lower interest rate, but you just extended the mortgage payment on this house to 44 years! That’s 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 refinance boom in the US started last May, and many of those who were eligible to refinance—or it made sense for them—have 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.

"A borrower should compare the difference in monthly payments between a 15- and 30-year fixed-rate mortgage to determine their own comfort level," says Alan Rosenbaum, founder and CEO of New York-based mortgage lender GuardHill Financial Corp.

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 impact their cash flow and what financial impact it will have on them if they lose all the monthly income they currently have,” 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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