With the extra time on our hands these past few weeks, we’ve had time to mull through our current finances and see where improvements can be made. We are generally good at frugality (see how you can stretch frugal muscles here), we have mastered a budget (and I’ve written a free course walking you through the process here), and have been very good at paying back out student loans so far. However, this does not mean there aren’t places where we can improve.
Since Mike has been without a job since February and since the dental offices have been open only a few days a week, our income has undoubtedly diminished over the last few months. With the lowering interest rates of mortgages, we decided, perhaps now is the time to refinance our home.
Refinance Can Save $$$
We purchased our home in 2018 and was given a locked rate of 4.875% at the time. After shopping around, we found rates offered to us today to be as low as 3.625%. I was alerted by the drop in interest rates by a colleague who was refinancing her home, and another who was in the process of closing on his first house purchase. The latter also informed me that he knew of someone who has refinanced their home twice in the last two years.
At first I was skeptical as to the efficiency of refinancing a home. Of course, there are closing costs to consider, and is that offset by the monthly savings due to a lower interest rate? After running some numbers, we have decided that yes, it is worthwhile.
We were able to rope in our closing costs into the total cost of the loan which made the appraisal fee our only up-front cost. After calculating using the new loan amount (with the closing cost added in), we found our monthly payment reduced by $500+ a month. Multiplied over the course of 30 years, this saves us $180,000, assuming we do not pay off the home early.
How to Refinance
The process was fairly easy, since we were sticking with the same mortgage company and they already had our mortgage details. We simply filled out an application form and Docu-signed necessary documents. You may need to provide additional documents such as proof of income in the form of paystubs, which you’re lender will specifically ask for.
Of course, you can always shop around with other lenders. I would recommend asking for referrals from friends and family members until you find one you like. The closing costs can always be negotiated, and you can shop for some services on your own which may end up being cheaper than going with the lender’s recommended vendors. Do not be afraid to ask which services you are allowed to shop for. We did shop around and entertained two other lenders, however, all three options gave us a similar interest rate. Since we already like our current lender and we try to do all things in simple ways (simple does matter), we decided to stick with our current one.
Of course, with the ever-changing landscape of COVID-19, you may run into a myriad of potential problems such as, but not limited to:
- Delayed processing due to an influx of multiple home-owners also trying to reduce their monthly payments.
- Volatile interest rates which are daily changing due to multiple people not being able to make their home payments, people losing their homes, and alternatively, people trying to buy homes at the low rate.
- Delayed services such as appraisals due to social distancing and stay-at-home protocols currently in place.
- Reduced income, depending on whether work-at-home is an available option for you, which can then affect your ability to refinance at all. If possible, keep your job so that you can prove that you have a solid income that can support the refinance.
- Increasing debts as the jobless try to stay afloat. My advice is to try to keep debts at a minimum so that credit scores are not greatly affected by this recession to come.
Despite these potential problems, I would still prompt you to pursue refinancing your home. There will likely be a recession post COVID-19 and house prices may not stay at their current rates. In fact, we may see something similar to 2008 when house prices drop drastically and when that’s the case, refinance would be a difficult thing to swing. I would refinance while the value of your home can still be appraised highly, and while you can get in on these low interest rates.