2020 has been a very unique year. Although, unique might not be the best word to describe this year, I chose that word because I try to see the positive in every circumstance. The pandemic took the world by surprise and changed our daily routines for the foreseeable future. A lot of us got used to working from home, with children partying in the background, some of us lost their jobs and others found an opportunity to make a change. For most people, the uncertainty of future income and financial stability added extra anxiety in daily lives.
From a mortgage perspective a big positive that happened this year, specifically since the pandemic started is that interest rates dropped at an all time low. Here are the top 4 reasons why so many homeowners refinance their properties in the last few months.
Reduce your monthly Mortgage payment
This is a fairly obvious one. With the interest rates being so low now, if you hold a 600K mortgage at 3.2% interest rate, on a 25 year amortization, your monthly payments would be $2901.4. On that some mortgage if you refinanced at 2.09% interest rate (which is now a pretty common refinance rate) your monthly payment will reduce to $2566.8. For homeowners that were in the middle of a term, this venture might carry a cost of breaking an existing mortgage which in most cases is far less the monthly savings over the next 5 years,
Pay off Debt
For some Homeowners it became difficult to service their monthly debt payments. A lot of homeowners refinanced to pay off their credit cards, car payments and other loans. Paying off a car and credits cards with your mortgage over 25 years carries certain downsides but it significantly helps improve your immediate cash flow situation.
Invest after the stock market crash
Some homeowners that are a bit more savvy on the investment side, leveraged their equities in their homes in order to make some money in the stock market. If you take out $100,000 equity from your home at 2.2% interest rate and make an average of 8-10% on your investments than you are essentially in the positive every year. The markets have been very strong so far this year and a lot of homeowners who invested in the first week or two after the initial dip because of the pandemic are up 20%-30%.
Purchase another property
Some of us realized that we will be working from home for the unforeseeable future and the necessity of being in the city or being close to work is now gone. Especially during the time of quarantine, a bigger home, bigger lot and more space became a new form of luxury. The purchase of a second property carries a requirement of 20% downpayment as well as enough income to qualify you for another mortgage. Two things happened here:
- If a homeowner didn’t qualify for another mortgage because their monthly payments on the first mortgage were to high, they would refinance to get a lower interest rate and stretch out the amortization to 25 or 30 years in order to reduce their monthly payments.
- They would take out equity to have enough funds to put 20% on the new property they are purchasing,