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I refinanced my mortgage during COVID-19, and thanks to low interest rates I'll save about $50,000

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When my wife and I bought our home about three years ago, we were thrilled to just be approved for a loan. As a newly self-employed writer, we definitely had to jump through a few hoops to buy our home despite credit scores above 800.

Earlier this year, now with years of self-employment under my belt, the coronavirus crisis landed in the United States and drove the Federal Reserve to slash interest rates to near zero. As mortgage rates quickly followed, the time was ripe for a mortgage refinance. Here's a look at exactly how much I'll save thanks to my newly refinanced mortgage.

Coronavirus and mortgage interest rates

In an effort to keep our economy humming along in the right direction, the Federal Reserve sets a target interest rate for interbank overnight loans . Mortgage, credit card, savings account, and other consumer interest rates tend to follow.

In March 2020, the Fed cut the target interest rate from between 1.50% and 1.75% down to between 0% and 0.25%. According to Freddie Mac , the average interest rate fell from 4.27% in March 2019 to 3.45% in March 2020. In April, it fell even further to an average of 3.31%.

The interest rate you ultimately qualify for is based on market rates, the lender you choose, and your own finances. Your credit score, income, and other debt are all part of the formula used to determine your mortgage interest rate.

My mortgage costs at 4.25%

When we bought our house, my wife and I signed up for a mortgage loan with a balance of $306,000 and a 4.25% interest rate. We took the typical 30-year fixed mortgage , which meant we would have a fixed payment for 360 months in a row.

My old mortgage loan had a monthly payment of about $1,505 per month, not including property taxes or insurance . Over the life of the loan, we would make $541,921 in payments. That's $306,000 in principal and $235,921 in interest over the life of the loan.

My mortgage costs at 3.25%

When rates dropped, I did a little shopping around and called up my existing mortgage lender to start a refinance. Based on our excellent credit scores , we were able to lock in a low 3.25% interest rate for a new loan. That's a full 1% savings compared to our old rate.

Because we had made some progress paying off our original mortgage, our new balance after refinancing (including some fees) was $297,000. That led to a payment of about $1,447 per month.

With the new loan, we save about $50 per month. That's not life-changing money, but it also let us trim years off of our loan. While we had a 30-year loan with 27 years remaining before, our new loan is just 25 years. That cut about 24 payments off the end of our loan.

Under our new loan terms, we have to pay $434,199 over the life of the loan. That breaks down to $297,000 in principal and $137,199 in interest. Including the payments we made on our previous loan, our new mortgage rate will save us about $50,000 over the life of our loan.

It could be a perfect moment to refinance your mortgage

In the last few weeks, rates have continued to fall. With excellent credit, it's now possible to get rates well below 3%. If rates fall any more , I might have to refinance again! According to CNBC , some lenders are offering rates as low as 2.75% for a 30-year mortgage.

If your credit or income have stayed the same or improved since you signed your mortgage papers, it could be the perfect time to refinance . With record low rates, you could save thousands, or tens of thousands, by locking in a lower rate.

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