The current pandemic has pushed many people to work from home. As a result, many homebuyers – both old and new – are now entering the market. In the United States, mortgage applications to purchase a home increased by 2% for the second week of December 2020, despite the fact that December is historically not a strong month for home sales. Additionally, there has been a surge in refinance demand, up by 105% according to CNBC, as mortgage rates set their 15th record low of 2020.
We may wonder, what is a refinance and why is it in demand nowadays? A refinance, refinancing, or “refi” simply means the replacement of an existing debt obligation with another debt obligation under different terms. Usually, it relates to a loan or mortgage, in which the terms of an existing credit agreement are revised and replaced. These changes in the terms are favorable to a business or an individual’s interest rate, payment schedule, and/or other terms outlined in their contract.
Borrowers usually refinance when there is a substantial change in the interest rate, giving them potential savings on debt payments from a new agreement.
With the current pandemic and global downturn, interest rates have fallen, making now the best time to refinance your mortgage loans, car loans, or student loans. Still wondering how refi works and its benefits? This online free refinance calculator will show you how much you can save by refinancing your mortgage.
Let’s say your home price is $300,000, and you make a 20% down payment, which is $60,000. You will have an original loan amount of $240,000 from your chosen lender. Your original APR is 7% for a 30-year term, and you still have 20 years or 240 months left to pay your mortgage. Let’s set aside refinancing closing costs in this computation for a clearer explanation, but be prepared for these additional costs if you are going to refinance your loan or mortgage.
If interest rates suddenly fall to 5% because of the pandemic, refinancing your mortgage during this period would reduce your monthly payment from $1,596.73 to $1,073.65, meaning you would save $523.08 monthly for the remaining 20 years of your loan term.
Refinancing is a consumer’s response to shifting economic conditions. They do this to lower the fixed interest rate, reduce payments over the life of the loan, change the duration of the loan, or switch from a fixed-rate mortgage to an adjustable-rate mortgage or vice versa.
If a borrower’s credit profile has improved, they may also refinance their loan to pay off their existing debts by consolidating them into one low-priced loan.
Why should you consider refinancing amidst this pandemic? First, you can get a lower monthly mortgage payment and interest rate, which means significant savings. From the example above, the borrower will save $523 per month by refinancing. Imagine what that amount can do for your monthly expenses. Another benefit of refinancing is that you can convert an adjustable interest rate to a fixed interest rate, and you can acquire an influx of cash for pressing financial needs.
