With mortgage rates hovering near three percent, experts say there are still a number of homeowners who could benefit from refinancing. In fact, borrowers who refinanced in 2020 to lower their mortgage rate saved over $2,800 in mortgage payments annually, according to the latest Freddie Mac research.
“While today’s low mortgage rates have fueled a refinance boom, it’s been driven mainly by higher-income borrowers. With millions of borrowers eligible to refinance, lower- and middle-income borrowers who could stand to benefit the most from refinancing might be leaving money on the table,” says Sam Khater, Freddie Mac’s chief economist.
To determine whether refinancing makes financial sense for you, it’s essential to first understand the basics. Here’s what to know about the refinancing process:
- Understanding refinancing: When refinancing your mortgage, you are essentially applying for a new mortgage with the goal of securing a loan with better terms than your current one. Primarily, people refinance their mortgages for three reasons: to lower their interest rate, to switch from one product to another (i.e. switch from an adjustable-rate mortgage to a fixed-rate mortgage) or switch to a loan with a shorter term.
- Determining refinancing costs: While refinancing can save you money, it isn’t free. Just as there are closing costs and associated fees with your current mortgage, there are related costs to refinance your loan. To get a sense of what refinancing could cost you, use Freddie Mac’s refinance calculator, which is available at calculators.freddiemac.com.
- Knowing your options: The refinancing option that is best for you will depend on your financial situation and goals. The most common option is to refinance the remaining unpaid balance on your mortgage. Through refinancing, you can improve your financial position by shortening your term or locking in a lower interest rate. Your lender will be able to discuss refinancing options with you and help determine the best solution for your situation.
- Closing your loan: Closing on your new loan is the final step in the refinancing process, a procedure that is almost identical to when you initially closed on your current mortgage. During closing, it’s important that you take your time to read all documents carefully and ask clarifying questions. Once all of the closing documents are signed, you will have a new loan.
For more information on refinancing, visit myhome.freddiemac.com.
Remember, even with today’s mortgage rates near historic lows, it’s important to carefully evaluate your situation and your home goals with a housing counselor or lender.