Downsizing to cut home costs? Consider refinancing instead

The last year has been challenging for American finances. Millions of Americans were laid off or let go from their jobs, and others were forced to work reduced hours as the coronavirus pandemic shut down communities and businesses.

Harvard economists predict that the pandemic could cost the American economy as much as $16 trillion by this fall. At the end of 2020, an estimated 2.8 million homeowners had their home loans in forbearance. As we move further into 2021, many homeowners may be looking to cut housing expenses by downsizing to save money.

But, with historic low-interest rates and an expensive housing market, buying a smaller home may not be the best decision right now.

Refinancing your home could be much more comfortable and save you time and money. If you’re considering a home refinance, you can explore your refinance options by visiting Credible to compare rates and lenders.

Why refinancing may be the better option

If you’re trying to save money on your home, lowering your monthly mortgage payment is one of the most obvious options. However, buying a cheaper home may not save you the most money right now. Closing costs alone could make a sizable dent in your savings account, meaning refinancing may be your better (and cheaper) option.

Record low (or near-record low) interest rates

In March 2020, the Federal Reserve issued an emergency rate reduction to near 0%. The Federal Reserve hoped to stimulate the economy by reducing interest rates. That move helped lower the average mortgage rate to historical lows.

At publication, the average 30-year fixed-rate mortgage was 3.02%, and the average 15-year fixed-rate mortgage was 2.34%. At this same time last year, the average 30-year fixed rate was 3.47%, and the average 15-year fixed-rate was 2.97%. In February of 2019, the 30-year fixed rate was 4.46%, and the 15-year fixed-rate was 3.89%.

While low-interest rates may indicate that it’s an excellent time to buy, it may be cheaper for you to refinance your current loan into a lower interest rate. Additionally, a cash-out refinance could allow you to borrow money against your equity to pay off high-interest debt or cover emergency expenses at low rates.

Visit an online marketplace like Credible to view refinance rates and get cash out to pay off high-interest debt.

Savings over the life of the loan

When you refinance your home, you’ll pay the same fees you would pay for a new loan, as well as a .5% adverse market fee for any refinance over $125,000, but the savings of a refinance may be more substantial than you think.

Here’s an example:

Current home:

• Initial loan of $400,000 for 30 years, at 4.0% interest.
• Current monthly payment: $1910.00

The homeowner has been paying for several years and currently owes $250,000 on the same property.

Refinance options

$250,000 at a 2.75% interest rate over 30 years. The new monthly payment would be: $1021.00 (a monthly savings of $889)

If they refinance into a 2.2% interest rate for the next 15-years, their new monthly payment would be $1632.00 (a monthly savings of $278).

Both options offer lower monthly payments, and the 15-year loan would allow the borrower to pay the loan off faster.

Economic uncertainty

If this last year has taught us anything, it’s that nothing is guaranteed, especially when it comes to the economy. While the Federal Reserve has indicated that rates will likely remain low through 2023, things could change. If you want to refinance your home, now may be your best time.

Something else to consider is that the housing market is tight right now. There is a shortage of available homes on the market, and that’s driving housing prices up. You could end up paying more for a house, or you may not be able to find one at all.

Refinancing won’t make sense for everyone. There are pros and cons of all mortgage loans (that's why using a refinance calculator is recommended). If you plan to sell the property in the next five years or have a few years left on your loan, refinancing may cost you more than it’s worth. The thousands of dollars you spend in refinance closing costs could offset the extra cash you were anticipating getting via the refinance.

Other ways to cut housing costs

If you still need more ideas to save money, here are a few ways to reduce your housing expenses:

• Get a roommate
• Rent a room or basement apartment on a vacation rental site
• Rent out storage space in your garage or shed
• Increase your insurance deductible
• Sell your home and rent a less expensive property
• Handle minor maintenance issues yourself
• Reduce landscape expenses with a low-maintenance yard

Take some time to research your options and decide if a refinance is right for you. Refinancing your mortgage isn't always an easy decision and it's not always dependent on lower rates. Visit Credible to get in touch with experienced loan officers and get all of your mortgage questions answered.