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There is a reason why so many homeowners rushed to refinance in 2020. Mortgage refinancing rates have been extremely competitive, helping these homeowners to reap a world of savings.
If you missed the boat on refinancing in 2020, or if it didn’t make sense to you – say, you needed time to raise your credit score – don’t worry. There is a good chance that refinancing rates will remain low throughout 2021, so you will still have many opportunities to save money by paying for your home. And if you’re looking forward to refinancing, here are three strategies to watch out for.
1. Refinance a loan with the same term
Many people who refinance simply obtain a new mortgage with the same term as the existing mortgage. And this is a path that you can consider. In other words, if you have a 30-year mortgage, you can refinance for a new 30-year mortgage – but at a lower rate.
There is certainly nothing wrong with refinancing for the same loan term, but you should know that this may not be the best idea if you have been paying your mortgage for several years. Imagine that you made a 30-year mortgage six years ago. If you refinance for a new 30-year loan, you will set the mortgage clock and end up paying for a longer total period. On the other hand, if you’ve only been on a 30-year mortgage for a year or two, setting the clock is not so terrible.
In some cases, you may find a mortgage lender willing to take out a custom refinancing term. When you apply for a mortgage, you are usually limited to a 15, 20, or 30-year loan, although some lenders also offer a 10-year mortgage. But there are lenders who will give you, say, a 24-year mortgage, if that is the number of years remaining on your loan. Your options are worth exploring.
2. Make a withdrawal refinance to pay other debts
With a withdrawal refinance, you borrow more than the remaining mortgage balance and receive a check for the difference. That extra money is yours to spend as you please. If you are carrying expensive debt (say, some credit card balances at an average interest rate of 20%), a withdrawal refinance can make a lot of sense to you at today’s low rates.
Imagine that you owe $ 150,000 on your mortgage and $ 20,000 on credit cards that are charging 20% interest. With a withdrawal refinance, you would borrow $ 170,000, use $ 150,000 to pay off your initial mortgage, and then use $ 20,000 to pay off your credit cards. You would then pay that entire $ 170,000 as a single loan. And if you get a 3% interest rate on refinancing your withdrawal, it means that you would effectively pay that $ 20,000 in credit card debt at a rate of 3%, not 20%.
3. Switch from a 30-year loan to a 15-year loan to pay your home early
Many homeowners opt for a 30-year mortgage instead of a 15-year loan because it results in lower monthly payments. But with a 15-year mortgage, you can get a lower interest rate than with a 30-year loan. So if you intend to refinance, at today’s rates, a 15-year loan can end up being much more affordable than you might think. If you can make the highest monthly payment, it can make a lot of sense. That way, you’ll save money on interest and Quit your home much earlier.
This change makes sense especially if you bought a home a little later in life and are looking forward to paying for it when you retire. Let’s say you are 50 years old, 26 years from your 30-year mortgage. If you refinance a 15-year loan and follow that payment schedule, you will be free of the mortgage at age 65, a common time to retire or at least start thinking about it.
If you are interested in refinancing your mortgage next year, think about which strategy makes the most sense for you. With the right approach, you can save a lot.