Three Refinance Strategies for 2021

It seems everywhere you go people are talking about refinancing. Your neighbors, family, friends, Facebook & TV ads, mailers…the list goes on. In the midst of a very painful 2020, refinance applications exploded as rates dropped to all-time lows due increased demand from investors. When investors buy mortgage bonds, it increases prices, and decreases rates for borrowers.

As we enter 2021, there are a few refinancing strategies to consider, possibly even if you refinanced as recently as last year. I wanted to outline a few options that Trey Reed of Intercoastal Mortgage talked through with me earlier this year. (This was a conversation and is not an endorsement of a person or product.)

(1) Simply ask your lender for a lower rate

Believe it or not, some banks are offering to lower their customers' mortgage rate so they don't have to do the process of a full refinance. Banks are overwhelmed with refinance applications so this is a way for them to lower the administrative burden. Keep in mind, the rate will likely not be anywhere close to the current market rate - for example if your mortgage is at 4% and current rates are 3%, they might lower your rate to 3.75% or 3.5%. If you don't plan to stay in the home for 5 years or longer, this might make more sense than a full refinance. 

(2)   Ask for a lender credit for a higher rate

You are probably familiar with mortgage lenders offering the option to “buy points” to have your rate lowered. As I mentioned in my post Should I Buy Points on My Refinance? buying points can work out, but for the majority of people, the bank comes out ahead, which is why they offer them. Getting a lender credit for a higher rate is essentially the opposite of buying points – you are selling the bank points, accepting a higher rate in exchange for a credit that they give you at closing to offset closing costs. For example, if you have a $400,000 mortgage and are thinking of refinancing to the current rate, for example, of 3%, they might give you a lender credit of $4,000 if you take a rate of 3.25%. If your closing costs are $4,000, you have broken even immediately and you come out ahead if your current mortgage is higher than the refinance rate of 3.25%.

(3) Consider switching to a shorter term

If you have always had a 30-year mortgage, now might be an opportunity for you to switch to a 15-year or 20-year. If for example your 30-year mortgage is at 4%, switching to a 15-year mortgage might result in a similar monthly payment because of the lower rate, allowing you to pay off your mortgage much faster if that is a priority for you.  

Thank you for reading,

Alex

This blog post is not advice. Please read disclaimers.