By Angela Brown, FoxBusiness
As 2021 takes hold, you may be considering refinancing your home. As current rates hover around historic lows, homeowners have an unprecedented opportunity to save thousands of dollars. But if you’re unfamiliar with refinancing or what options are available, it can be an overwhelming process. This quick guide will offer some insight into what a mortgage refinance could look like in 2021.
Are mortgage rates going to drop more in 2021?
Here are the rate forecasts: In September, the Federal Reserve announced that they plan to keep lower rates through at least 2023 in response to the pandemic.
In March 2020, the Federal Reserve announced an emergency rate cut to nearly 0%. The cut was an effort to stabilize the economy as the coronavirus pandemic shut down businesses and put millions of Americans out of work.
In January 2020, before the emergency interest rate cut, the average 30-year fixed-rate mortgage was 3.60% and the average rate for a 15-year fixed-rate mortgage was 3.04%. Today, the rates are nearly a full percentage lower. The average 30-year fixed-rate mortgage is 2.73%, and the average 15-year fixed-rate mortgage is 2.21%, according to Freddie Mac.
Mortgage refinance options
When considering a refinance, you have two basic options, the rate-and-term mortgage refinance and the cash-out refinance. Both offer unique benefits that might best fit your financial needs.
Rate-and-term mortgage refinance
Cash-out refinance
1. Rate-and-term mortgage refinance
Rate-and-term mortgage refinances are a common option. A rate-and-term refinance allows you to change the rate or the repayment terms of your loan. For example, you could refinance from a 30-year fixed-rate mortgage to a 15-year-fixed-rate mortgage. Alternatively, you could refinance to lower your interest rate. Some borrowers even refinance from an adjustable-rate mortgage to a fixed-rate mortgage.
In theory, you could even go from a 30-year ARM at 3.5% to a 15-year fixed-rate mortgage at 2.5%.
If your current mortgage rate is higher than today's averages, then you will want to consider refinancing.
2. Cash-out refinance
When you opt for a cash-out refinance, you replace your current mortgage with a new loan that’s more than what you currently owe. You receive funds exceeding what you owe in cash. For example, if you owe $100,000 on your home and refinance to a loan for $150,000, the extra $50,000 would be the total cash out you would take.
4 things to consider before refinancing
Before you apply for a refinance, some situations factor into whether now is the right time for you to refinance and/or what type of rates you can expect. Here are some factors you should consider to determine if you're ready to refinance.
Forbearance
Credit history
Home equity
Cost
1. Forbearance
Many homeowners took advantage of forbearance options provided by the CARES Act. You may still be able to qualify for a home refinance if you can make your monthly payments on time for at least three months following your forbearance. Most lenders won’t refinance a home when it is in forbearance.
[We require you to be current on your mortgage payments up to at least three months to be considered for a refinance while in mortgage forbearance.]
2. Credit history
Since a refinance replaces your old loan with a new one, you’ll need to qualify for the new loan in the same way you did for your original mortgage. Your lender will want to look at your credit score and credit history. You’ll qualify for better rates with higher scores.
3. Home equity
Ideally, you have at least 20 percent equity in your property before you refinance. If you have less than 20 percent, you’re likely paying PMI (private mortgage insurance). While some lenders will refinance with less than 20 percent, you’d have to refinance again in the future to get rid of your PMI.
4. Cost
Refinances aren’t free. In addition to fees your lender charges, all new refinances over $125,000 will pay an extra .5% adverse market fee. The average refinance costs several thousand dollars, so make sure you can recoup the cost before leaving the property.