If you have a mortgage, now is a great time to think about refinancing. Mortgage rates have dropped repeatedly since the start of 2020 and now stand at less than 3%. Refinancing is a good way to lower your monthly mortgage payments, and paying less often translates extra savings.
[ Read: The Best Refinance Mortgage Companies of 2020 ]
Recently, writers for the data company CoreLogic authored a blog post about refinancing. They specifically used data and artificial intelligence (AI) to predict which cities would see the most significant rise in refinancing applications. So, if you live in one of the 10 cities mentioned below, this is a good time to capitalize on low interest rates.
- Colorado Springs, Colo.
- Ogden-Clearfield, UT
- Denver-Aurora-Lakewood, Colo.
- Las Vegas-Henderson-Paradise, Nev.
- Boise City, Ind.
- Salt Lake City, UT
- San Diego-Carlsbad, Calif.
- Phoenix-Mesa-Scottsdale, Ariz.
- Portland-Vancouver-Hillsboro, Ore.
- Riverside-San Bernardino-Ontario, Calif.
Why these cities?
The most significant factors used, with the help of AI were: volume of housing supply, equity and interest rates. Let’s say there are a lot of homes for sale in your neighborhood, and interest rates are low. If you have a lot of available equity — meaning, the difference between what you owe on your house and what it’s worth — you may choose to refinance rather than sell.
So, according to the list, the supply of available houses in these areas is relatively low compared to demand. This national trend is due in part to the pandemic. The initial uncertainty surrounding COVID-19 caused many homeowners to postpone or even cancel plans to sell. The market has rebounded somewhat, but inventory remains low.
[ Read: The Best Mortgage Rates for September 2020 ]
With interest rates at nearly a 50-year low, one could argue that homeowners in these areas have interest rates above, if not well-above, 3%. Nationwide, about half of all mortgages in the United States have interest rates at 4% or higher.
It seems likely that low interest rates would attract buyers to the market, and that short supply would increase bids on available houses and drive up prices. Well, both of these appear to be true — especially in San Diego and Denver — two of the 10 cities on the list.
Yet, homeowners don’t seem to be putting their houses on the market in these areas. Lower interest rates combined with higher available equity could lead people to refinance rather than sell. This makes more sense if the owner planned to stay in the area, but wanted to find a new place to live, or if they were planning a major life change that no longer made sense during the pandemic.
When should you consider refinancing your mortgage?
“It’s a great time for many homeowners to refinance, depending on specific circumstances,” says Paul Buege, President & COO of Inlanta Mortgage. “Individuals with larger loan balances will experience great benefits. Refinancing your mortgage loan will help save on long-term interest expenses, along with lower monthly payments to improve your household cash flow. It also benefits homeowners who plan on staying in their homes at least a couple of years after refinancing.”
[ Read: How to Refinance Your Mortgage ]
It may be a good time to refinance, but is this a good time for you? Ask yourself a few questions before making this decision. First, how is your credit score? Your credit score is one of the most significant metrics lenders use when considering whether to authorize a new loan. Within that, if you are approved, the terms of your new loan will be at least partially impacted by your score.
“Make sure your credit is in good shape,” said Buege. “Consumers with credit issues still have options, but not as many.”
Consider short-term benefits versus long-term costs
In economics, there’s something called a break-even point. The New York Times presented a simple way to understand the idea. The break-even point is total costs/monthly savings = the total number of months to recover savings.
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This equation takes into account the different fees and closing costs that are built into mortgages. So, let’s say the total costs to refinance are $ 5,000 and the total monthly savings are $ 150. With these figures, it would take nearly three years before you break even, and can then see real savings. If you need money right away, refinancing might not be the best route, but if you’re in this for the long haul, then these numbers might not feel so daunting. Put another way, know what you need and why you want to refinance your home as opposed to selling it.
“The main thing to consider when refinancing is to know what your goals are by doing so,” said Buege. “Are you looking to save money on interest by refinancing to a lower rate, or are you seeking to shorten the life of your loan?”
Too long, didn’t read?
Falling interest rates make this a good time to refinance your mortgage. Data shows that applications to refinance will climb over the next few months, especially in the 10 U.S. cities cited in CoreLogic’s August 2020 report. When deciding to refinance, it’s important to make sure your credit is in good shape and that you fully understand why you want to refinance, as well as the overall costs and benefits.
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