Pros and Cons of refinancing your home during COVID-19

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Covid-19 has had a very large impact on our economy in the past few months. Job loss, health concerns, schools reconstructed, and concern over which bills to pay weigh heavy in our hearts. More and more people are feeling the financial strain that this global pandemic has caused. Taking the initiative to talk to your lenders may be difficult when your concerns are elsewhere. Anxieties and fears are running rampant.

Some people are reaching out to their financial lenders to see if their mortgage can be put on hold. While pausing payments might be helpful, this could put a bigger strain on your bank account in the future. You want to do all that you can to prevent loss of equity. If you’re thinking about refinancing your home during Covid-19, let’s take a look at the pros and cons of this situation.

Do interest rates play a role?

Interest rates have gone up and down a bit during this pandemic, but they’ve been pretty low lately. If you’re really interested in refinancing and were thinking about it a while ago, now might be a good time to talk to your lender or mortgage company.  Do you have equity in the home and are your bills are still in the green? You can lock in at the right moment when rates are where you want them to be.

The terms of your refinancing can vary from state to state and lender to lender, so it’s a good idea to look into the details of your refinance package before you sign on the dotted line. A significantly lower interest rate could still be beneficial in the long run. This really depends on the interest rate that you started with. One percent lower on your interest rate isn’t going to guarantee any significant savings. A few percentages lower may be worth it in the long run.

What may be the cost to refinance?

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How much money are you spending to refinance?

There are some costs to take into consideration when you refinance a loan. While you might be acquiring a lower interest rate for the long term, you’ll have to take on closing costs and maybe attorney fees. Sort of like you did when you first closed on your home. Yes, refinancing a home will typically come with lower closing costs and not so many inspection fees. As well, some lenders are offering lower terms and fees during this pandemic. Do your homework and search around if you’re not sure who may have the best services for your needs.

The cost to refinance may be paid back with the money you’re saving with a lower interest rate. However, keep in mind that sometimes you will have to pay down debt to see the loan through as your debt to loan ratio may be too high. With COVID-19 job losses on the rise, bills may or may not be delinquent and lenders may require you to pay them during the refinance. This may take away from cash in your pocket at the new close of your refinance.

Will you have financial strain after refinancing?

The lower interest rate is designed to benefit you over the course of many years. It’s not a savings that you experience right away. If you are not in a financial bind, a refinance can work in your best interest. If you have your bills up to date and money in the bank, you should be fine.

However, you could be putting yourself into a financial strain after completing the refinance. If you are currently feeling the pressure of pinching your dollars, consider seriously the after-effects of the refinance. You will be hard-pressed to be able to do it again for two years or so. Receiving some immediate cash from the refinance may ease your burdens temporarily. But if your lifestyle leads you to live high on the hog, so to speak, you could blow through the cash out quickly. This typically isn’t a process to take on if you’re already struggling with money. Your bank may be able to help you in other ways that make more sense for your situation.

Can you be proactive with your approach when under financial stress?

Can you make the calls needed to talk to your creditors? Some people get stressed so much their anxieties take over. The worse answer you can hear is NO. But if you don’t ask, you will find it difficult to pull yourself out of any trouble. The longer you wait, the worse the situation becomes. Again, if your current situation is strained and stressful, you may be looking into refinancing for the wrong reasons.

It may be best to take a proactive approach with your bills and banks. Call them and see if they have other options during this worldwide pandemic. If you go onto most websites, they are telling you to reach out for help if you need it. This global health issue has affected most people around the world. Other options, such as paying back what you get behind in through payments, repositioning 6 months to a year of payments to the bank end of loans, and forgiveness all can have a powerful effect on your emotional stress in a positive way.

Will it be beneficial?

The other side of refinancing is starting your mortgage payments all over again. Your banks are more than happy to refinance your mortgage because they can collect more interest. Let me explain. When you refinance, you begin all over again with your 15, 20, or 30-year mortgage. The first 5 to 10 years of the loan collects mostly interest with very little going to the principal of the loan. This is where banks and mortgage companies make more money. They are betting on you to refinance when times get tough. Some appraisers look at your home with different eyes during a refinance opportunity as well.

No one can tell you what is right for you and your family. It is best if you try to ascertain your current situation and determine just how much it will improve if certain bills can be paid off or paid down. Most people think it helps to write everything down and that way you can see the numbers in front of you. How long will the cash out last for you in your current status of financial obligations? Will you need to use those credit cards again after you refinance? Or will you be able to keep them paid off? Going back into debt so quickly after a refinance can have detrimental outcomes.

Will Refinancing Lead to Bankruptcy?

Refinancing can seem like a great idea, however, it is front-loaded to pay the most interest at the front of the loan. The bank is getting their profit first. It takes about ten years to start paying on the actual loan, so if you’re already a number of years into your mortgage, you might be better off staying with the financial product and interest rate that you have right now. Otherwise, you could end up in deeper financial hardship. It may seem like you’re getting free money with refinancing but you’re not.

Waiting it out while the government keeps eviction and foreclosure moratoriums on the table may make things worse when they are lifted. If you are forthright with all your debtors/creditors during this worldwide pandemic, it will be easier to focus on more important things, like family and health. Debtors and creditors are willing to work with you NOW. If you wait too long, once the moratorium is lifted, you could be facing foreclosure and/or bankruptcy.

In short, the current economy might not be great, but there may be ways that you can afford to stay in your home a little easier. Mortgage rates are very competitive and low right now. Refinancing may be in your future with promise. It’s a good idea to speak with a financial advisor or bank representative to see what may be the perfect solution for your finances right now. Once the creditors reach out to the courts for resolution of your late payments, it may be too late for your financial freedom.

 

About the Author

I have been a Realtor in Central Florida since 2006. I live and work in Polk County. I am a straightforward person who refuses to cut corners and places emphasis on honesty and integrity in the home buying and selling process. I firmly believe that it is my duty to serve others and to use my negotiating skills to obtain the best price for the sale of any home. I will take disciplined initiative in all aspects of any transaction, invests timeless effort to build a strong and lasting relationship with all clients, and streamline all aspects of the real estate processes with exceptional skill and diligence. I take pride in professionalism and continue to educate myself and adapt to the ever changing conditions of the real estate market.

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