There have been few positive aspects to the COVID-19 pandemic, but good news for homeowners is the reduction in market interest rates. Many people have chosen to refinance their mortgages at a time when rates have reached as low as 2.5%.
Refinancing your mortgage essentially means that you are swapping out your old mortgage for a new one – and possibly a new balance. When you refinance your mortgage, your bank or lender will pay off your old mortgage with the new one.
Homeowners can refinance to take advantage of lower market interest rates, cash out some of their equity, or reduce their monthly payment with a longer repayment term.
Ralph DiSciullo, owner and branch manager of American Financial Network in Winter Garden, has been a lender for seven years.
As a direct lender, DiSciullo essentially eliminates the man in the middle – the mortgage broker who connects clients with lenders.
“Seven, eight, nine years ago, banks got very strict about why they can lend,” he said. “We have banks calling us – they can’t handle the customer for (a number of) reasons, maybe bad credit.”
A person’s credit rating is an important factor in determining the loan interest rate they can get based on their “creditworthiness”.
“A good credit score is above 750,” DiSciullo said. “Between 650 and 750 is average. Banks usually won’t touch anyone below 640, but I’ll go down to a credit score of 500.… I won’t tell you no, I’ll show you the way to refinance your home.
He said homeowners save more money if they can reduce the interest rate by a full percentage point. This savings can be reinvested over the life of the loan to reduce monthly payments, it can be used to do home renovations or install a swimming pool, or it can help pay high interest credit card bills.
Six months ago, people could get an interest rate of 2.5% to 2.75%; however, inflation has pushed this percentage up to between 3% and 4% since the first part of the year.
But it still passes a considerable saving on to the owners.
One of the downsides of refinancing is that it costs money to take out a new mortgage to pay off the old one. Homeowners will pay the same fees as when they first bought the home, including title insurance as well as creation, application and closing costs.
Experts advise against refinancing if homeowners don’t plan to stay in their home for a long time, as they will end up spending more than they save. It is important to calculate the breakeven point of these costs and know exactly when you start to reap the benefits of lower interest rates. In some cases, it can take two or three years.
DiSciullo said anyone considering refinancing should do their research and ask questions before deciding who will handle the transaction. Find out if you are dealing with a broker or a direct lender, find out about the type of interest rate the business has, and find out about closing costs.
Homeowners with high credit card balances might benefit from refinancing.
“Let’s say someone pays 20% interest on their credit card; now they’re paying 3%, so there’s a big savings there, ”DiSciullo said. “It’s working the numbers.”
Refinancing a mortgage and combining debt – like credit cards or car and student loans – could result in an increase in monthly payments of $ 600, but if that cuts monthly percentage rate payments by $ 600 high, it actually generates a significant saving.
DiSciullo recently helped a woman save $ 600 per month by recalculating and refinancing her $ 40,000 in student loans.
“Money is king,” DiSciullo said. “If I can put $ 1,000 more in your pocket but increase your payout by just $ 100, it’s a win-win situation.”