Mortgage Rates: Despite low interest rates, not all homeowners refinance. Do you need to refinance now?

Patrick Naughton and his son Brendan

Patrick Naughton describes himself as ‘home poor’.

When he bought a ranch house for $336,500 in Braintree, Massachusetts in 2001, Naughton hoped he could pay off his 30-year mortgage in retirement and own his home in full.

“In a perfect world, I would have had 10 more years on my original loan,” he says. “But life throws a lot of curveballs.”

A divorce left Naughton, 53, who was raising his six children as a single father, in a financial mess that nearly cost him his home. Though he managed to hold on to it, despite two jobs, he could barely make a dent in his loan amount.

At the beginning of this year, he decided to take advantage of the pandemic-induced historically low interest rates and refinance his mortgage. He switched from a 15-year mortgage he took out in December 2018 to a 30-year mortgage, reducing his interest rate from 3.75% to 2.6% and his monthly payment by $ 900 was reduced. His closing costs were $2,500.

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From April 2020 through the end of March 2021, approximately 10.7 million – or 20% of homeowners with mortgages – refinanced their loans. At the same time, 14.1 million homeowners, or a quarter of all borrowers who are strong candidates for refinancing, are currently not benefiting from low interest rates, which hit 2.86% this week, according to an analysis to USA TODAY by Black Knight Inc, a mortgage data provider. and technology company.

Black Knight defines these borrowers as mortgage holders with a 30-year term, good credit (720 plus) and equity of at least 20%.

These 14.1 million borrowers could save an average of $286 per month, the analysis found.

There are an additional 22.7 million borrowers who are considered “in the money” (meaning they have a mortgage rate at least 0.75% higher than the prevailing interest rate, but do not meet all of Black Knight’s broad eligibility criteria ).

According to Freddie Mac, homeowners who refinanced their 30-year fixed-rate mortgage in 2020 saved an average of more than $2,800 a year and cut their interest rates by a full percentage point.

While a higher proportion of black and Latino borrowers have a financial incentive to refinance, they do so at significantly lower levels than white borrowers, according to a survey by Freddie Mac earlier this year.

The study, based on 30-year fixed-rate loans active in January 2021 and funded by the mortgage giant, found that 50% of black and Latino borrowers could save at least $100 a month by refinancing at current rates. prices. That number was 38% for white borrowers. However, only 19.6% of black borrowers and 23.4% of Latino borrowers had refinanced, compared to 32.1% of white borrowers.

There are many borrowers who could potentially save quite a bit by refinancing, says Len Kiefer, deputy chief economist at Freddie Mac.

“Rates have fallen so much that it may well be that borrowers who refinanced even a year ago could benefit from refinancing,” he says.

More than a quarter of current mortgage holders (27%) don’t even know their current rate, putting them in a bad position to determine whether refinancing is worth it, a November survey conducted by Bankrate found.

“If your current mortgage rate is 3.5% or higher and you plan on staying in your home for more than two to three years, you should at least look into refinancing,” said Greg McBride, Bankrate’s chief financial analyst. “With most borrowers having a strong credit lock in 30-year rates of less than 3% and the ability to factor closing costs into your loan in many cases, you can reduce your monthly payments with no out-of-pocket costs.”

The reasons homeowners cited for not refinancing included a belief that they would not save enough money (33%); high closing costs (23%); too much paperwork and hassle (22%) and low credit score (10%).

Patrick Naughton

Patrick Naughton

Naughton, a commercial painter, says his finances took a hit last year when many offices were closed during the pandemic.

“I couldn’t make my $2,750 mortgage every month without overtime,” he says. “It was a struggle.”

Then he came over To admit, a mortgage technology company that helps customers buy mortgages and compare mortgage rates from regional lenders.

While his outstanding mortgage was still $335,000, the house had increased in value by nearly $300,000. He said he had received five offers with different conditions. He chose one that allowed him a payout refinance and the opportunity to use $40,000 to help with his youngest daughter’s college expenses.

McBride offered a number of scenarios when refinancing might make sense:

For example, suppose a person took out a 30-year loan of $300,000 at 4% six years ago, and has current monthly payments of $1,432 and a remaining balance of $265,000. Now if they refinance at 2.875%, roll in $5,000 in closing costs so that their new balance is $270,000, the $1,120 monthly payment will save them $312 a month and they can recoup the closing costs in 16 months.

And if they didn’t want to extend that loan balance to 30 years, they could refinance into a 20-year loan at 2.25% (by entering the cost so that the new balance is $270,000). Their monthly payment remains essentially the same, but they can pay off the loan four years earlier.

Borrowers should also shop around and get quotes from three different lenders, McBride says.

“Don’t just look at the interest, but also look at the fees that are charged,” he says. “Look around for title insurance and ask about the replacement or reissue rate as this can be a great savings.”

If you expect to move within the next two to three years, have only a few years left on your original loan, or have a loan balance of less than $50,000, then refinancing may not make sense, McBride says.

Here are six things to consider if you’re considering refinancing your mortgage, provided by Patrick Boyaggi, co-founder and CEO of Own Up, and Len Kiefer, economist at Freddie Mac.

Mortgage interest varies

“The rate and fees offered on your mortgage can vary widely from lender to lender. The difference between the top and bottom of the range equates to tens of thousands of interest over the life of your loan. Very few borrowers understand this,” Boyaggi says.

Looking around at refinancing

As part of the estimates, lenders must provide potential borrowers with estimates of what those costs will look like.

“Our research has shown that borrowers should really try to get to know the market and try to understand what their options are,” says Kiefer.

Shopping is a way to empower yourself and increase your chance of a price and rate combination at the bottom of the range. The more you shop, the better your expected results are.

When refinancing makes sense

A simple thing a borrower could do as a break-even analysis. Find out how much they actually have to pay in terms of initial cost to do the refinancing and compare that to their reduction in their monthly payments. The lender would already should be able to provide that information to find out how long it would take to break even,” says Kiefer.

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Buying a mortgage can be extremely time consuming. A digital marketplace, such as Own Up, can make it easy for borrowers to navigate different lenders, compare rates, and make better home financing decisions, even if they decide to refinance elsewhere.

Reduce monthly payments by extending the loan term

If your goal is to reduce your monthly expenses, refinancing and extending your loan term will reduce those monthly payments.

“And lowering your interest rate by 0.25% or more can provide significant savings — you can save up to tens of thousands of dollars over the life of the loan,” Boyaggi says.

Think about your timeline: how long do you stay in the house?

Boyaggi says that a refinancing that doesn’t reduce monthly costs, but shortens the loan term by many years, will save you money over time, especially if you plan on staying in your home for several years. However, if you’re planning to move sooner, keep your break-even timeline in mind, as there’s no point in selling your home before that date.

Swapna Venugopal Ramaswamy is the housing and economics reporter for USA TODAY. Follow her on Twitter @SwapnaVenugopal

This article originally appeared on USA TODAY: Refinance mortgage interest in 2021: low interest rates can save you money