Patrick Naughton describes himself as a “poor house”.

In 2001, when he bought a ranch home for $ 336,500 in Braintree, Massachusetts, Naughton hoped he could pay off his 30-year mortgage upon retirement and own his home.

“In a perfect world, I would have 10 years left on my original loan,” he says. “But life throws a lot of curved balls.”

A divorce plunged Naughton, 53, who raised his six children as a single father, into a financial mess that nearly cost him his house. Although he managed to keep it, he could barely reduce his loan amount despite two jobs.

Then, at the start of this year, he decided to take advantage of the historically low interest rates caused by the pandemic and refinance his mortgage. He went from a 15-year mortgage he took out in December 2018 to a 30-year mortgage, reducing his interest rate from 3.75% to 2.6% and reducing his monthly payments by $ 900. His closing costs were $ 2,500.

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FHFA program: Low-income borrowers could save between $ 100 and $ 200 per month by refinancing

From April 2020 to the end of March 2021, around 10.7 million – or 20% of mortgage owners – refinanced their loans. At the same time, 14.1 million homeowners, or a quarter of all borrowers who are good candidates for refinancing, are currently missing out on low interest rates, which hit 2.86% this week, according to a report. analysis provided to USA TODAY. by Black Knight Inc, a mortgage data and technology company.

Black Knight defines these borrowers as 30-year mortgage holders who are up-to-date on payments, have good credit (720 plus), and have at least 20% equity in the home.

Those 14.1 million borrowers could save an average of $ 286 per month, according to the analysis.

There are 22.7 million additional borrowers who are considered ‘in the money’ (meaning they have mortgage rates of at least 0.75% above the going rate, but do not meet not all of the general Black Knight eligibility criteria).

On average, homeowners who refinanced their 30-year fixed-rate mortgage in 2020 saved more than $ 2,800 per year and reduced their interest rate by one percentage point, according to Freddie Mac.

However, even though a higher proportion of black and Latino borrowers have a financial incentive to refinance, they do so at significantly lower levels than white borrowers, according to a study by Freddie Mac conducted earlier this year.

The study, based on 30-year fixed-rate loans active in January 2021 and funded by the mortgage giant, found that 50% of black and Latino borrowers could save at least $ 100 per month through refinancing at rates. current. This number was 38% for white borrowers. However, only 19.6% of black borrowers and 23.4% of Latino borrowers had refinanced compared to 32.1% of white borrowers.

There are a lot of borrowers who could potentially save a lot by refinancing, says Len Kiefer, deputy chief economist at Freddie Mac.

“Rates have come down enough that it may well be that borrowers who even refinanced a year ago can qualify for refinancing,” he says.

More than a quarter of current mortgage holders (27%) don’t even know their current rate, putting themselves in a bad position to determine whether refinancing is worth it, a November survey by Bankrate found.

“If your current mortgage rate is 3.5% or more and you plan to stay in your home for more than two to three years, you should at least consider refinancing,” says Greg McBride, chief financial analyst at Bankrate. “With most borrowers who have a strong credit foreclosure with 30-year rates of less than 3% and the ability to build closing costs into your loan in many cases, you could lower your monthly payments without any down payment.” . “

Reasons given by homeowners for not refinancing included believing they would not save enough money (33%); high closing costs (23%); too much paperwork and hassle (22%) and a low credit score (10%).

Naughton, a commercial painter, says his finances took a hit last year when many offices closed during the pandemic.

“I couldn’t do my $ 2,750 mortgage every month without working overtime,” he says. “It was a fight.”

It was then that he stumbled upon Own, a mortgage technology company that helps clients purchase mortgages and compare mortgage rates from regional lenders.

While his outstanding mortgage still stood at $ 335,000, the home’s value had increased by almost $ 300,000. He said he received five offers with different terms. He chose one that gave him cash refinancing and the ability to use $ 40,000 to help pay for his youngest daughter’s tuition.

McBride offered a few scenarios in which refinancing might make sense:

For example, say a person took out a loan of $ 300,000 over 30 years six years ago at 4%, and has current monthly payments of $ 1,432 and a remaining balance of $ 265,000. If they now refinance at 2.875%, factor in $ 5,000 in closing costs so that their new balance is $ 270,000, the monthly payment of $ 1,120 would save them $ 312 per month and they could recoup the fees. closing in 16 months.

And if they didn’t want to stretch the balance on that loan over 30 years, they could refinance to a 20-year loan at 2.25% (including the costs so that the new balance is $ 270,000). Their monthly payment remains essentially the same, but they are able to repay the loan four years earlier.

Borrowers should also shop around and get quotes from three different lenders, McBride says.

“Don’t just focus on the interest rate, but also the fees charged,” he says. “Buy title insurance and ask for the switch or reissue rate, because that can be a big savings. “

If you plan to move in the next two to three years, have only a few years left on your original loan, or have a loan balance of less than $ 50,000, refinancing might not make sense, says McBride. .

Here are six things to consider if you’re considering refinancing your mortgage, provided by Patrick Boyaggi, co-founder and CEO of Own Up, and Len Kiefer, economist at Freddie Mac.

Mortgage interest rates vary

“The rate and fees offered on your mortgage can vary widely from lender to lender. The difference between the top and the bottom of the range equals tens of thousands of interest over the life of your loan. Very few borrowers understand this, ”Boyaggi explains.

Shop around when refinancing

As part of the estimates, lenders are required to provide potential borrowers with an estimate of what these costs will look like.

“Our research has shown that borrowers should really try to know the market and try to understand what their options are,” says Kiefer.

Shopping is a way to empower yourself and increase your chances of getting a combination of fares and fees at the lower end of the range. The bigger your store, the better the expected results.

When refinancing makes sense

“A simple thing a borrower could do is break even analysis. Find out how much he will actually have to pay in terms of the upfront costs to refinance and compare that to the reduction in his monthly payments. The lender should be able to provide all of this information to sort of determine how long it would take to break even, ”says Kiefer.

Lender rates: compare using new technology tools

Buying a mortgage can be time consuming. A digital marketplace, like Own Up, can make it easy for borrowers to navigate a variety of lenders, compare rates, and make better mortgage financing decisions, even if they decide to refinance elsewhere.

Reduce monthly payments by extending the term of the loan

If your goal is to reduce your monthly expenses, refinancing and extending the term of your loan will reduce those monthly payments.

“And a drop in your interest rate of 0.25% or more can result in substantial savings – saving you up to tens of thousands of dollars over the life of the loan,” Boyaggi explains.

Consider your schedule: how long will you be in the house?

Boyaggi says that refinancing that doesn’t lower monthly costs but shortens the loan term by several years will save you money over time, especially if you plan to stay in your home for several years. If you are planning to move earlier, however, be aware of your breakeven deadline as it doesn’t make sense to sell your home before then.

Swapna Venugopal Ramaswamy is Housing and Economics reporter for USA TODAY. Follow her on Twitter @SwapnaVenugopal

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