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CommunityMoney SmartsOctober 13, 2020
The Federal Reserve took steps earlier in 2020 to keep money flowing through the mortgage financing system. The actions, including two rate cuts, were part of the central bank's broader efforts to protect the economy from more damage from the COVID-19 pandemic. These steps are good news for anyone considering a mortgage refinance at this time. So what exactly is a refinance? What does it entail? A refinance is a new mortgage loan to pay off your existing mortgage loan. The same holds true for an automobile refinance; namely, you are obtaining a new car loan to pay off your current car loan.
So why would anyone want to take out a new loan to replace an existing loan? There are many reasons why homeowners refinance: to obtain a lower interest rate/payment; to shorten the term of their mortgage; to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa; to tap into home equity to raise funds to deal with a financial emergency, finance a large purchase such as college tuition, or consolidate debt. Interest rates have fallen since the beginning of the COVID-19 pandemic. Current refinance rates for home loans can be found by checking your credit union's website or calling 833-275-4528.
According to Bankrate, the benchmark 30-year fixed-rate mortgage continued to drop into September, 2020 to below 3%; which sits significantly lower than its position earlier in the year. This provides consumers a great opportunity to take advantage of the rate environment, allowing for major savings when refinancing a home or looking to make a new home purchase. You can use the mortgage calculator on GLCU's website to see what monthly mortgage payments would look like at different interest rates and terms.
There are also positives to refinancing your car loan. You can save money if you refinance for a lower interest rate than what you currently have. A good rule of thumb is to refinance if you can decrease your interest by at least two percentage points. For example, let's say you borrowed $20,000 over five years at an interest rate of 6%. In this scenario, your monthly payment would be $387. If you were to apply for a refinance loan and get a 4% rate while keeping the same 60-month term, your payment would drop to $368.  You can check your potential refinance rates on different websites, such as the one listed on GLCU's vehicle loan site.
Once you have decided that you want to refinance your home or auto loan, you need to consider a few things, such as your credit score, interest rates, refinance requirements, closing costs, and prepayment penalties. Due to the current low loan rates, lenders are more stringent with requirements. Refinance requirements on the part of the lender could require a history of six to 12 months of on-time payments. Prepayment penalties are another thing to consider. While this fee isn't too typical among major car lenders, it does exist. If your loan documents show a prepayment penalty, refinancing likely won't make sense if the savings you get from the loan switch don't exceed the cost of the penalty.  The same holds for closing costs, which can add about 3% to your loan. Closing costs on a $100,000 home loan can add another $3,000 to the refinance. Because of this, refinancing may not be the best course of action if you plan on selling your home before you recoup the associated refinance fees. Another reason to hold back on refinancing is if you are planning on making a big purchase soon, such as that of a car or another home, since refinancing will drop your credit score when the lender pulls it.
Refinancing your home or auto loan can be a worthwhile endeavor if your credit and work history are solid. You can save thousands of dollars over the life of the loan with a well thought out and researched refinance.
 Lewis, H. (2020, April 29). What the New Coronavirus Means for Your Home Loan and Mortgage Rates, retrieved from https://www.nerdwallet.com/blog/mortgages/what-coronavirus-means-for-your-home-loan-and-mortgage-rates/
 Staff, Investopedia. “When (and When Not) to Refinance Your Mortgage.” Investopedia, Investopedia, www.investopedia.com/mortgage/refinance/when-and-when-not-to-refinance-mortgage/#:~:text=There%20are%20many%20reasons%20why,finance%20a%20large%20purchase%2C%20or.
 Refinance Rates: Compare today's rates. (2020, May 21), retrieved from https://www.bankrate.com/mortgages/refinance-rates/?pointsChanged=false&searchChanged=true&mortgageType=Refinance&zipCode=60045&partnerId=br3&ttcid&userCreditScore=730&userVeteranStatus=NoMilitaryService&userHadPriorVaLoan=false&userHasVaDisabilities=false&userFirstTimeHomebuyer=false&userQuickClosing=false&userFha=false&userLowUpfrontCosts=false&userLowPayment=false&purchasePrice=450000&purchaseDownPayment=90000&purchasePropertyType=SingleFamily&purchasePropertyUse=PrimaryResidence&purchaseLoanTerms=30yr&purchasePoints=All&refinancePropertyValue=450000&refinanceLoanAmount=360000&refinancePropertyType=SingleFamily&refinancePropertyUse=PrimaryResidence&refinanceCashOutAmount=0&refinancePoints=All&refinanceLoanTerms=30yr
 Luthi, B. (2020, May 11). How to Get Help With Your Auto Loan During COVID-19, from https://www.experian.com/blogs/ask-experian/can-i-get-auto-loan-help/
 Luthi, B. (2019, September 12). When's the Best Time to Refinance Your Car Loan?, from https://www.experian.com/blogs/ask-experian/when-should-i-refinance-my-car-loan/