The current pandemic had pushed a lot of people to work from home, therefore a lot of homebuyers – 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, in history, is not typically a strong month for home sales. Apart from this, there is also a surge in the Refinance demand of 105%, as reported by the CNBC, as mortgage rates set 15th record low of 2020.
We may wonder, what is a refinance and why is it on 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 is 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.
Usually, borrowers 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 fall and therefore, now is 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 be able to show how much you will save by refinancing your mortgage.
Let’s say that your home price is $300,000 and you pay 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 at 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 cost in this computation for clearer explanation, but be ready for this additional cost if you are going to refinance your loan or mortgage.
Suddenly, interest rates fall to 5% because of the pandemic. When you refinance your mortgage during this period, your monthly payment will be reduced from $1,596.73 to $1,073.65 which means you will 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 to reduce payments over the life of the loan, to change the duration of the loan, or to switch from a fixed-rate mortgage to an adjustable-rate mortgage or vice versa.
If a borrower’s credit profile has improved, they also tend to refinance their loan to pay off their existing debts by consolidating them into one low-priced loan.
Why do you have to consider refinancing amidst this pandemic? First, you can get a lower monthly mortgage payment and interest rate, which means you will save a lot. From the example above, the borrower will save $523 per month for refinancing. Imagine what that amount can do to your monthly expenses. Another pros 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 a pressing financial need.