The coronavirus pandemic has led to a dramatic decline in mortgage rates. But that doesn’t mean that now is a good time to refinance for everyone.
Last week, Freddie Mac FMCC,
It reported that mortgage rates hit a new record low for the fourth time this year, with the average rate on a 30-year fixed-rate mortgage dropping to 3.13%.
When rates hit their first all-time low of the year in March, it triggered a deluge of refinancing activity as many lenders were transitioning to remote work environments due to the spread of COVID-19. That led to a massive build-up of some lenders, and some borrowers waited weeks for their refinances to close.
Now, the market has established itself and lenders have adapted to the world of coronavirus. And the good news for borrowers is that most markets are served by mobile notary services, said Pat Stone, co-founder and president of title insurance company Williston Financial Group, and other states allow fully virtual mortgage processes. That means that getting a new mortgage loan in most parts of the country will not mean putting your health at risk, as infection rates remain stubbornly high in many areas.
Read more: Home prices continued to rise even as the coronavirus pandemic spread across the United States, says FHFA
But will refinancing your mortgage put your financial health at risk? This is what homeowners should consider before closing a new loan.
Find out when you will reach break-even point
As a general rule, experts say a refinance will be worth it if you give the owner an interest rate that is 50 to 75 basis points lower than the rate on your current mortgage. This is because the reduced interest will offset the closing costs associated with refinancing.
But those savings don’t come right away: it will be a few years before the savings through monthly payments accumulate to exceed the costs.
“If you’re in your home forever, it might make sense to refinance with a half-point rate drop,” said Holden Lewis, a housing and mortgage expert at the personal finance website NerdWallet. “But if you plan to sell the house within the next five years, it will most likely not be worth it because you will pay more fees than you would save during that time.”
“If you’re in your home forever, it might make sense to refinance with a half-point rate decrease.”
Pay attention to the term of the loan.
Homeowners don’t necessarily have to default on a 30-year loan, despite its popularity.
“Because rates have dropped so much, you could probably get a 15-year loan and maybe keep or even lower your monthly payment,” said Tendayi Kapfidze, chief economist at LendingTree TREE,
. “You are going to pay off the loan sooner and pay less interest.”
However, choosing a shorter term has its downsides, experts in the mortgage industry warn, if blocking such a loan means making larger monthly payments. The standard 30-year mortgage offers flexibility.
“You have the flexibility to pay more each month when you can afford it, and you can reduce the minimum payment required during unsafe times,” said Lewis.
Don’t be afraid to close costs
When doing your balance analysis, don’t shy away from paying closing costs. While paying those costs up front may seem like you’re making refinancing more expensive, it could actually be saving you money.
“It’s always attractive to say ‘no cost’, but you could end up paying it over the life of the loan,” said Brian Koss, executive vice president of Mortgage Network, a Massachusetts-based lender. That’s because those costs don’t go away. Rather, they can be transferred to the loan balance or generate a higher interest rate.
In that sense, you can prepay your interest by paying mortgage points. The initial cost, again, will be higher if you do this, but it will save you thousands of interest.
The tumultuous economy has made rating difficult.
As millions of Americans lost their jobs or were fired due to the closure of coronavirus-related businesses, lenders entered damage control mode. Many lenders raised the standards that borrowers must meet to qualify for a new loan. This included higher minimum credit scores and lower debt-to-income ratios, among other factors.
The possibility of an impending economic recovery is far from certain. While the labor market has improved in recent weeks, some states that have reopened their economies have seen an increase in coronavirus cases.
“It’s always attractive to say” no cost, “but you could end up paying it over the life of the loan.”
“The V-shaped bounce was kind of an impossible dream in the first place, and it seems less and less likely, despite recent data we’ve seen,” said Kapfidze. “I have been anticipating that lenders will become increasingly conservative and restrictive with their lending standards.”
If you were fired, laid off, or are self-employed, it may be more difficult to obtain approval for a refinance. In these cases, borrowers can get lucky by turning to their current lender for a refinance.
“Your current lender is heavily invested in you,” said Kapfidze. It will cost them money to lose business, so they may be willing to offer refinance offers to homeowners.
If you received patience, you may encounter obstacles
The CARES Act allowed millions of Americans to take advantage of the ability to claim leniency on their mortgage payments.
But being on a leniency plan could disqualify an owner from certain types of loans. If you missed payments during the leniency, you must make at least three current payments after the plan ends to be eligible for a refinance on a Fannie Mae FNMA-backed loan,
or Freddie Mac.
See also:Americans are looking at suburban homes as pent-up demand hits the housing market
But if you were one of the many Americans who applied for the leniency but continued to make payments, you will be eligible to refinance immediately as long as you keep up with your loan.
Finally, don’t try to time the market
Yes, mortgage rates have fallen to a new record low several times this year. But there is no guarantee that the trend will continue.
“People expect a rate of half a percent below where we are now relatively, that’s getting greedy,” said Koss.
There is a significant upside risk to mortgage rates at this time. Its recent declines came largely after stock and bond markets responded to negative news about the coronavirus pandemic.
The potential for a second wave remains, and some states are seeing another wave of infections as part of the first wave of the outbreak. But health experts have suggested that a vaccine could come very soon, and researchers have several promising candidates for coronavirus treatments.
If a vaccine or treatment for COVID-19 is announced, that would likely trigger a recovery in the markets, and mortgage rates would rise overall.
“Don’t try to time the bottom, just choose the rate that makes the most sense,” said Koss.