When you refinance your mortgage, you pay off your existing loan and replace it with a completely new agreement. Refinancing usually comes at a cost, which, in most cases, is between 2-5% of the loan principal, not to mention the appraisal, application fees, and the title search. Because of this, it’s important to know whether or not the time is right.
Why should you consider refinancing?
There are many reasons why people choose to refinance. Some of the biggest motivators for entering the refinancing process include:
- Saving money when a lower interest rate is available.
- Shortening a mortgage term.
- Converting from an adjustable-rate mortgage to a fixed-rate mortgage.
- Utilizing home equity. Either to consolidate debt, finance a purchase, or pay for an unexpected expense.
As we have already mentioned, there are a number of key points you need to consider when reviewing whether or not now is the time to refinance. The most important of all, for most, is going to be the financial viability of doing so. Aside from this, the length of time you plan to live at a property is an important factor too.
Mortgage Rates During the Coronavirus Crisis
An article about refinancing in 2020 would not be complete without an acknowledgment about how mortgage rates have already and, are still likely to be impacted by the coronavirus pandemic.
Most people will be aware of the fact that the Federal Reserve has made a significant cut to their interest rates this month. In what is being hailed as their second emergency response to this outbreak, they lowered the target for the federal funds rate to a range of between 0-0.25%. The secondary rate cut within just two weeks was twice the amount of the first cut, at a full percentage point.
In a statement made by the Federal Reserve’s Federal Open Market Committee, they state:
“The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals”.
What we have already witnessed so far this month has been an all-time record low home loan rate in the U.S. Just a few weeks before writing this post, the rates fell to 3.29%. However, no sooner than it dropped, did we then experience one of the biggest hikes that have been witnessed in many years. This resulted in mortgage rates being offered at around 3.65%. Although, at present, this temporary rise in mortgage rates isn’t overly positive, it is thought to be a short-term phenomenon that will soon rectify itself and result in lower mortgage rates once more.
According to Gordon Miller of Miller Lending Group, who has been quoted in USA today:
“I’ve never experienced anything like this. We’re getting lenders saying ‘No refinance today. Only purchases’ … I’ve been telling borrowers the industry is begging for a timeout.”Gordon Miller
With the growing economic uncertainty, the coronavirus pandemic is driving down interest rates, resulting in unprecedented demand, to a level that has not been seen for more than a decade.
The Impact of Interest Rate Changes Made By the Federal Reserve
As we witnessed back in 2008, when the great recession unfolded, and the Federal Reserve stepped in; when the economy starts to struggle, the Federal Reserve will step in and cut interest rates. Similarly, when the economy is doing well, they step in and raise taxes.
The logic behind them getting involved in this way, and the theoretical explanation is, that by reducing rates, it lowers the cost of borrowing money. With the money that people are now able to afford to borrow, they hire people, they increase production and generally inject that money back into the economy. In reserve, when the economy is booming, this logic will work in reverse.
When interest rates change, there are significant impacts on the ways in which people and companies get access to credit in order to help them pay their bills or make purchases. It can even impact life insurance coverage too.
Is Now the Right Time to Refinance My Mortgage?
Looking back to the original question asked in this post, is it the right time to look at refinancing? Or, is it wise to hold-off, and sit things out in the hope of a better deal in the future?
Let’s take a quick look at the facts.
Most recently, the U.S has seen one of the lowest mortgage rates of all time, at 3.29%. While this rate has lifted as the month of March has progressed, it has largely been due to the fact that lenders were inundated with applications for refinancing. Applications for refinancing soared by approximately 225% and lenders needed to implement certain measures that have allowed them to clear the backlog of applications. It is thought that this will take approximately 90 days.
When the lenders have cleared their backlog, they are going to become competitive once more. It is also thought that the Federal Reserve has not yet finished with their efforts of quantitative easing just yet either.
According to expert opinion, many believe that lower mortgage rates are imminent. Due to many moving parts, there can be no guarantee; however, it is expected that when the lower rates are released, there will be a surge in applications, as was the case at the start of March when 3.29% was being offered.
At this point, nobody knows whether or not the lower mortgage rates will be above the 3.29% barrier, or if the rates will decrease to a level below this. However, in terms of getting ready to refinance, you can certainly put things in place, in anticipation of the next period of reduced mortgage rates.
Practically speaking, if you want to lock down a refinancing agreement when these expected lower rates return, there are a few things you can do in order to help secure the deal. The first is to get your application to refinance in with a lender now. Then, make sure you keep your file active with your lender, as you’ll need to float it until the right opportunity is presented. Be ready to submit any asset or income documentation, but don’t pay for your appraisal until such a point you decide you want to lock—in a specific mortgage rate and go ahead with the deal.