Time to Refinance?

Old Dominion Capital Management |

The coronavirus pandemic has led to a dramatic decline in mortgage rates.

Mortgage rates have dropped this year, with 3.13% being the average rate on a 30-year fixed-rate mortgage.

So, does that mean that now is a good time to refinance?  The answer is, as usual, it depends on your situation.

Here are some things to consider before closing on a new loan.

1 - Figure out when you’ll break even

As a general rule of thumb, experts say that a refinance will be worthwhile if it will net the homeowner an interest rate between 50 and 75 basis points lower than their current mortgage rate. That’s because the reduced interest will compensate for the closing costs associated with the refinance.

But those savings don’t come immediately — it will take a few years before the savings via monthly payments accrue enough to outweigh the costs.

In short, if you’re in your "forever" home, it might make sense to refinance with a half-point rate decrease, but if you plan to sell the home within five years or so, it’s most likely not worth it because you’ll pay more in fees than you would save during that time.

2 - Pay attention to the loan’s term

Homeowners shouldn’t necessarily default to a 30-year loan, despite their popularity.

Because rates have fallen so much, it’s possible that you could get into a 15-year loan and maybe maintain or even lower your monthly payment.  You’re going to pay off the loan sooner and you will pay less interest.

Choosing a shorter term has its trade-offs though, if locking into such a loan means making larger monthly payments. The standard 30-year mortgage offers flexibility to pay extra in those months when you can afford to, and cut back to the minimum required payment when necessary.

3 - Don’t be afraid of closing costs

When doing your break-even analysis, don’t shy away from paying closing costs. While paying those costs upfront may seem like it’s making the refinance more expensive, in reality it could be saving you money.

Along those lines, you can pre-pay some interest by paying mortgage “points”. The upfront cost, again, will be higher if you do this, but may save you thousands of dollars in interest over the life of the mortgage.

4 - The tumultuous economy has made it harder to qualify for a mortgage

As millions of Americans lost their jobs or were furloughed because of coronavirus-related business closures, lenders went into damage control mode. Many lenders raised the standards borrowers must meet to qualify for a new loan. This included higher minimum credit scores and lower debt-to-income ratios, among other factors.

5 - If you were furloughed, laid off or if you’re self-employed, it could be harder to get approval for a refinance

In these cases, you may be better off turning to your current lender for a refinance or mortgage loan modification.  Your current lender is heavily invested in you. It will cost them money to lose business, so they may be willing to offer deals on refinancing.  Or, they may be able to modify the mortgage you currently have to reduce your interest rate.

6 - If you received forbearance, you may hit roadblocks

The CARES Act allowed millions of Americans to claim forbearance from their mortgage payments.  However, being in a forbearance plan could disqualify a homeowner from certain types of loans. If you skipped payments while in forbearance, you must make at least three current payments after ending the plan to be eligible for a refinance into a loan backed by Fannie Mae or Freddie Mac.  On the other hand, if you were one of the many Americans who requested forbearance but continued making payments, you will be eligible to refinance right away, as long as you stay current on your loan.

 

7 - Finally, don’t try to time the market

Yes, mortgage rates have fallen dramatically this year, but there is no guarantee that trend will continue.  In fact, this year’s rate drops have largely come after the stock and bond markets have responded to negative news about the coronavirus pandemic.  If a vaccine or treatment for COVID-19 is announced, that would likely cause markets to rally — and mortgage rates could rise in tandem.

All that said, if you have not talked with your Advisor about refinancing your mortgage, now is a great time to do so!  Contact us at 434-977-1550 or info@odcm.com.

 

The Team at Old Dominion Capital Management