Have you seen the interest rates lately?
These are interesting times in the real estate business. My last blog post talked about new rules for buying or selling a home during the pandemic. A lot is changing in the financial markets, too, especially in the area of home loans and refinance.
You have probably heard today’s mortgage interest rates are low. That’s an understatement. According to a recent article in Forbes, rates haven’t been this low since 1971! The average 30-year fixed rate for a home purchase is currently 3.150%. For a refinance, it’s 3.210%. The 15-year fixed rate for purchase is 2.750%. For refinance it’s 2.780%.
This begs the question, if you are a homeowner, should you refinance your home loan now to take advantage of these low rates? For many, the short answer is yes, this is a great time to refinance. But that doesn’t mean it’s right for everyone. To know if it’s right for you, you’ll want to not only look at current interest rates and closing costs but also your personal situation and financial goals.
When refinancing makes sense
People refinance for lots of reasons – to lower their mortgage payment, to build greater home equity and, for some, to pay their mortgage off faster by changing its length, say, from a 30-years to a 15-years.
As a rule of thumb, if you can lower your interest rate by one-half to three-quarters of a percentage point, that can translate into substantial savings in your monthly payment. If that’s the case, it might be smart to refinance.
To see how much you can save, a mortgage refinance calculator is a good place to start.
However, if you are planning to sell your home within the next few years, refinancing may not be the best move for you. There are closing costs involved when you refinance. These are typically from 2% to 3% of your loan amount. You want to be sure your monthly savings are greater than the closing costs. If you plan to move soon, the savings may not add up. For instance, if you find that the break-even point on your new mortgage is 5 years, but you only plan on staying in your house for another 3 years, then refinancing might actually be more costly than just keeping your current mortgage, even if its interest rate is higher.
Similarly, if you are close to paying off your mortgage, it may not make sense to refinance. You might be better off using your money to pay off your remaining principal instead of paying the closing costs.
UPDATE: On August 12, 2020, Fannie Mae and Freddie Mac announced they are adding an additional 0.5% “adverse market fee” to all refinance loans. The fee would amount to around $1,400 on an average loan. The rule goes into effect Sept. 1. The organizations say the change is designed to shield them from possible loses brought on by the coronavirus pandemic. But the rule is controversial and is being challenged by numerous trade organizations and public interest groups. The White House also says they’re looking into the situation. If the rule is struck down I’ll update this blog post.
“Should I wait to see if rates fall even lower?“
This can be a tough call.
With rates now at an all-time low, the “bird in the hand” proverb comes to mind. Historically, record low rates have rarely stayed low for more than 12-months.
But these are unusual times. Covid-19 is affecting the economy in ways that may last for some time. According to Fannie Mae, low mortgage rates will last through 2021. Many experts predict rates will fall even lower into 2021.
It’s a particularly tough call if you have an adjustable rate mortgage and are considering switching to fixed rate mortgage. With fixed rates, you have peace-of-mind knowing what your payment will be each month. But what if rates drop further? You could miss out on greater savings if you keep your adjustable.
All this brings to mind the line from the movie Dirty Harry: “Do you feel lucky?” My feeling is don’t let greed be your guide. You’re better off choosing a rate that make sense for you instead of trying to time the bottom of the market.
How’s your credit score?
Just as with your original loan, a lender will need to qualify you to refinance your home loan. The better your credit score, the better your choice of interest rates and having your loan approved.
However, if the pandemic caused you to be furloughed, laid off or if you’re self-employed, you may find it harder to get approved. If that’s your situation, refinancing with your current lender may be your best bet. They’re already invested in you. And because it will cost them money to lose your business, they may be more flexible in their approval process.
Hopefully, some of these insights will help on your decision to refinance right now, or not. Of course, talking to a lender—or better yet, talking to a few—can give you’re the clearest picture. If you happen to live in Ohio, I’d be glad to point you to some excellent lenders I frequently do business with. Contact me any time.