The time is right to refinance your home
Judging from the elevated volume of mortgage refinancings in 2020, chances are you may have already secured a better interest rate on your loan this year.
If you haven’t, the good news is mortgage rates continued to set record lows in October, which means you can still take advantage of a favorable market.
But while refinancing is an option any homeowner with a mortgage may want to look into right now, it’s worth noting that it’s not the right move for everybody.
“A lot of people refinance and shouldn’t,” said Jacques Jacobson, a loan officer for Northpointe Bank, which has a branch in Wyomissing.
Historically low rates, but for how long?
Looking at the rates, it’s easy to understand how somebody could rush into refinancing before considering all the angles.
The average for a 30-year mortgage is currently hovering around 3%, while a 15-year is in the mid-to-low 2s — and while those record-low numbers are still trending downward, the market is volatile and difficult to predict.
Interest rates have been favorable to consumers for years now, but have been driven down farther in part by the economic response to the coronavirus, which has seen the U.S. government keep rates “artificially low” by investing money into mortgage-backed securities, notes Jacobson.
Some analysts are betting rates could continue to drop as long as the Federal Reserve remains committed to driving them down.
Jacobson, who’s been working in banking for 40 years and on residential mortgages specifically for around 20, isn’t sure how much lower rates can get.
“Anyone that has an interest rate that starts with a 4 should certainly look at refinancing,” said Jacobson.
“Even people that have rates in the high-to-mid 3s but have maybe paid in on their mortgage maybe five, six years and with
a low rate could keep payment somewhere around the same but shorten their term to 15 or 20 years.”
There are some hurdles — so jump them
For many homeowners, the downside to refinancing is minimal and mostly amounts to minor aggravations rather than massive obstacles.
One of the biggest differences now is how long it will take to process an application to refinance, which can take “at least 60 days,” said Jacobson. This is due to the huge surge in demand for refinancing, which began to peak when low rates arrived at the pandemic’s outset.
Some trade publications, such as Mortgage Professional America, are predicting the boom will end soon. However, refinances were still on the rise as of October, according to the Mortgage Bankers Association.
“Once COVID hit and the markets were affected, the rates shot down so of course there was a flood of refinances,” said Jacobson. “Things taking a little longer than normal because there’s so much volume, most banks and lenders don’t have enough underwriters and staff to get things done like we used to.”
You may have also heard or read about fees associated with refinancing rising.
There is truth to this — the Adverse Market Refinance Fee is currently slated to be implemented Dec. 1 and will help federally-backed lenders Fannie Mae and Freddie Mac recoup some $6 billion in projected losses resulting from COVID.
Even if you wait until the fee goes into effect, however, it’s not prohibitively expensive, and will also exempt balances under $125,000 and lower-income borrowers.
“It costs one half of one per
cent to the borrower, so if it’s a $100,000 refinance, it would either be $500 extra in the cost,” said Jacobson. “Or could just take a higher interest rate, so maybe if it was 2.8%, it becomes 2.9% if you don’t pay the $500 premium.
“Every little bit adds up, but it probably wouldn’t stop somebody.”
Should you refinance? Maybe, maybe not
As enticing as getting a lower rate sounds, again, refinancing is not the best play for everybody. One important factor to consider is how long it will take settle the debt and whether that timetable makes sense in your current situation.
For example, if you’ve already paid off a certain amount your loan, you might be better off simply trying to pay it off more quickly rather than secure lower payments, but spread out over greater time.
“You just want to make sure the money you’re saving doesn’t take an exorbitant amount of time to pay off,” said Jacobson. “Sometimes just paying the current loan back is faster.
“When you are adding cost on to current balance, sometimes it doesn’t make sense to finance.”
Jacobson adds if you’re thinking about moving in the next couple years, refinancing might not be your savviest option, either.
If you’re not sure what makes the most sense, or even if you think you are, the safe move is to speak to a loan professional who can help you weigh your options.
“The main thing is you have to be careful because people can get lulled into the fact they should refinance,” said Jacobson. “What you really need to know is what your future plans look like, and just make the call to someone who is a professional because they can guide you through if it makes sense or not.”