The coronavirus pandemic has wrought havoc not only with people’s health and day-to-day lives, but with their finances. Some people are looking for a financial silver lining to this dark cloud in the form of a mortgage refinance. With a recent drop in rates, does it make sense to refinance right now?
As with most complicated questions, the answer is “maybe.” Rates may be dropping, but that is not the only indicator you need to consider. The 30-year fixed mortgage rate has been hovering at near-record low levels for several weeks, zipping from 3.29 to 3.65, back down to 3.31, then back up to 3.60 during March and April of 2020.
You may be looking to refinance simply to take advantage of better rates than you had with your original mortgage. Or, like many people, you may be in a tough financial position and want to lower your monthly mortgage payments to relieve some of the pressure. Before deciding to refinance, here are some factors you should weigh.
Current mortgage interest rates are the first thing most people look at when deciding whether to refinance. The recent low rates have gotten the attention of many would-be refinancers, and lenders have been busy processing applications.
With the current volatility of markets, many lenders think it may be worthwhile for homeowners to take a wait-and-see approach; rates may drop still further. A general guideline has been that if current mortgage rates are more than 1% below your current rate, it is wise to consider a refinance. Under current conditions, many experts are recommending a refinance if your existing mortgage interest rate is above 4.0%.
Economists are predicting mortgage rates to drop further, so if you can sit tight a little longer, you may be rewarded. Of course, predictions are just that—not promises.
A lot may have changed in your financial life since you first purchased your home. If one of those things is your credit score, it will have an impact on your decision to refinance. Like many homeowners, your credit score may have improved since you qualified for your original mortgage. The higher your score, the better the interest rate you will qualify for.
You can check your FICO credit score from the comfort of your own home. If it hasn’t improved, or hasn’t improved as much as you would like, there are things that you can do to bring it up. First, get your hands on a copy of your credit report, and review it for accuracy. Don’t assume the credit bureaus get everything right. If you spot mistakes, contact the credit bureaus to have them corrected. Other simple measures include paying down credit card debt and other personal debt—assuming, of course, that you are able to do so.
If the house you want to refinance is your first home, there is a decent chance your down payment was less than 20% of the purchase price. If so, you have Private Mortgage Insurance, better known as PMI, rolled into your monthly payment.
Over time, of course, your mortgage payments have increased your equity in the home. If your equity in the house is now greater than 20%, a refinance may mean that you can drop PMI. This, along with reduced interest rates, will further reduce your monthly payment.
Of course, you may also be able to cash out some of the equity in your home to help with current expenses. That might be welcome if the coronavirus has put a squeeze on your income. Taking the money from a refinance can help you pay down higher debt, such as that from a credit card. But exercise great caution in doing so; taking cash out reduces your equity in the house and increases your debt. If you would be paying off credit card debt or other personal debt just to accumulate more in a few months, it may be wiser to leave the equity in your home.
The type of mortgage you currently have has a bearing on whether you should refinance. For instance, if you originally took out an adjustable rate mortgage (ARM), you likely had a favorable initial rate. The tradeoff for that low rate is the reality that in the future, your mortgage rate would adjust based on then-current interest rates. If rates go down, you win. If rates go up, you pay more.
If you’re facing an increased rate on your ARM, it could make sense to refinance for the certainty of a fixed rate. Speak with your financial professional to see if switching from an ARM to a fixed-rate mortgage is best for you.
Of course, there are other factors to consider as well when deciding to refinance. How long do you expect to stay in the home? Is the reduction in interest rate large enough to be worth it when you factor in the costs associated with refinancing, like closing costs, appraisal, and title fees? Remember, too, that while a refinance will reduce your monthly mortgage payment, it will lengthen the period of time you are making payments, and likely increase your overall payment of mortgage interest.
If you have questions about whether you should refinance your mortgage, estate planning and asset protection, or ways to shore up your finances during the coronavirus pandemic, we invite you to contact our law office to schedule a remote consultation.