Tons of millennials are refinancing their mortgages, and there are 4 reasons you might want to do the same

Tara Mastroeni

Dec 23, 2019, 20:13 IST

Tons of millennials are refinancing their mortgages, and there are 4 reasons you might want to do the same

Granger Wootz/Getty Images

The Fed has lowered interest rates three times in 2019, which means mortgage interest rates have dropped, too.
According to mortgage software company Ellie Mae, refinances represented 33% of all loans closed by millennials in September 2019, a notable high.
Ellie Mae's COO, Joe Tyrell, says refinancing is a great option if you want to access the equity in your home, get rid of your mortgage insurance, or can benefit from a lower mortgage interest rate.
Credible can help you refinance your mortgage for a lower monthly payment. Get a quote today »

Over the past year, the Federal Reserve has lowered interest rates three times, a move that has inspired a mortgage-refinancing boom among millennials.

New data from Ellie Mae, a tech company whose loan-processing software is used by many mortgage lenders, found that refinances represented 33% of all loans closed by millennials in September 2019. That's the highest percentage seen since Ellie Mae began tracking the data in early 2016, according to a recent press release.

The surge in mortgage refinancing seems to strongly correlate with the drop in interest rates. The company reports an 8% month-over-month rise in refinance rates since the average interest rate for 30-year mortgages fell to 3.91%, the lowest rate seen since 2016.

Joe Tyrrell, chief operating officer at Ellie Mae, attributes this recent surge in refinancing to a potential for cost savings. He explains:

"If you look at 2018 alone, the average [interest] rate that millennials were purchasing at was 4.78%. On a 30-year, fixed-rate mortgage at an average loan amount of about $241,000, that's a $1,263 payment that they're making. If you fast forward to today, where rates are at 3.8%, that's a savings of roughly $150-$250 per month."

"As millennials are realizing the total cost of homeownership, beyond just the mortgage payment, that amount makes a difference," he continues. "They're starting to realize that when you own a home, there's no landlord to call when things break."

Even if you're not a millennial, refinancing can have big benefits

That said, there's no age limit on refinancing. Even those who aren't part of the millennial generation may be able to take advantage of the benefits of refinancing.

As illustrated above, the most obvious benefit of refinancing is the opportunity to lower your monthly payment. Depending on when you bought your home, refinancing could help you secure a lower interest rate.

In turn, that lower interest rate would lead to a lower monthly payment - and less money spent over the life of the loan - which would help you put a few extra dollars back into your pocket each month.

Beyond lowering your monthly payment, Tyrrell points out how homeowners may also be able to leverage refinancing to help cover some of life's bigger expenses.

"In certain areas across the United States, there's been rapid appreciation of home values," he says. "With rates going down, there's an opportunity for people to refinance, keep their payment the same, and take a little bit of equity - or cash - out of the home to make improvements or cover big costs."

However, like everything else, the benefits of refinancing do come at a cost. In addition to needing to qualify for and close on a new loan - a process that involves paying approximately 1%-2% of your home's value in closing costs - there's also the value of your time to consider.

"If you're going to refinance, you're essentially going to start the clock over again on your mortgage," says Tyrrell. "It may take longer for you to own your home outright."

The big question: Should you refinance?

Ultimately, the decision of whether or not to refinance your mortgage is a personal one. But Tyrrell says there are a few scenarios where refinancing can make sense.

You can lower your interest rate

It's true that lowering your interest rate will help you lower your monthly payment. However, according to Tyrrell, there is a threshold at which refinancing to a lower rate will have a big enough payoff to make it worth going through the refinance process.

"A good rule of thumb is that if you're going to get at least half a percentage point reduction in rate, it might make sense for you to refinance," he says. "You'll get the benefit of that lower rate over time."

You want to change the terms of your loan

Refinancing may also make sense if you're looking to change the terms of your loan. If, for example, you're nearing the end of the introductory-rate time period on your adjustable-rate mortgage and are worried about how your rate will change, it might make sense to refinance into a fixed-rate loan, where you'd have stable monthly payments.

Similarly, refinancing could be a good idea if you're looking to make the switch from a 30-year loan to a 15-year loan.

You can get rid of mortgage insurance

Getting rid of mortgage insurance is also a primary reason why people refinance their mortgages. Anytime someone buys a home with a down payment of less than 20%, they're required to carry mortgage insurance, which becomes an additional fee that's added to their monthly payment.

However, if your house has appreciated since you took out your mortgage, or you've paid down the loan to below 80% of the home's value, you should be able to get rid of the mortgage insurance requirement and lower your monthly payment.

You want to access the equity in your home

The last reason to refinance your mortgage, according to Tyrrell, is to access the equity in your home. With a cash-out refinance, you can leverage the equity in your home to borrow more money than you owe and use the cash to finance big expenses.

"If you took out a $20,000 personal loan, it might be really difficult for you to afford to pay it back," Tyrrell explains. "But if you incorporate that amount of money over a 30-year loan, that makes it far more attainable to redo that kitchen or pay for college."

Find out how much you could save every month by refinancing your mortgage with Credible »

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