Before refinancing your mortgage, ask these basic questions
Widely credited with keeping the housing market vibrant during the coronavirus pandemic, mortgage rates recently fell to historically low levels. While Freddie Mac’s weekly average yesterday pegged the 30-year fixed rate at 3.13%, some homebuyers are already seeing interest rates below 3%, a steep reduction from just two years ago , when rates hovered around 5%.
It’s not just home buyers who are profiting from the cheap cost of borrowed money. Homeowners are also affected by mortgage refinancing. The latest reading of the Mortgage Bankers Association refinancing index is 76% higher than a year ago. The trade group expects refinancing origins to reach $ 1.35 billion this year, reaching their highest level since 2012.
This conducive funding environment is precipitated by the Federal Reserve’s commitment to keep interest rates low (close to 0%) and to continue buying mortgage-backed securities to help the economy shrink. the severe recession of Covid-19.
However, before homeowners rush to refinance their mortgage, there are a few basic questions to think about. Jerry Anderson, vice president of residential cash loans at Alliant Credit Union, helps shed light on some of the fundamentals.
When Should a Mortgage Lender Refinance?
“Your specific situation might be very different from mine, but everyone really has the opportunity right now,” says Anderson.
In general, homeowners should consider refinancing their mortgage when it would reduce their monthly expenses, shorten their loan term, or allow them to “pull” cash – or equity – out of their home.
While interest rates are at historically low levels, the savings (not the rate) offered by refinancing should drive homeowners’ decision, Anderson says.
“No one ever says, ‘Oh, I wish I had a 3% rate or I wished I had a 4% rate,” Anderson says. “They say, ‘Oh, I wish my payment was less.’ It is therefore really a question of taking into account the drop in my payments. ”
For example, reducing the interest rate from 3.8% to 3.5% on a 30-year $ 400,000 fixed rate mortgage, initiated 5 years ago, could save $ 250 each. months, if the refinanced loan also lasts three decades. Yet to keep the same term, effectively restarting the clock, would mean more interest paid overall.
“The flip side is going to be someone who is comfortable with their payment and who wants to speed up their loan repayment, in which case they can shorten their term,” says Anderson.
But sometimes it can also lead to higher monthly payments.
Tapping into the savings homeowners have accumulated in their homes through cash refinances is another reason to restructure their home loans. In this case, however, homeowners usually have other options, such as a home equity loan. Unlike a cash refinance, which extends the term of the first lien, the latter is a second loan made against the equity in a home.
The good news is that home equity has increased even during the current economic downturn as home prices have remained stable. The bad news is that some lenders have tightened their cash refinancing requirements, which usually cost more.
What documents do lenders need from homeowners to refinance in light of the pandemic?
The typical documents requested by lenders – think employment records and third-party property appraisals – have not changed due to the pandemic. The novelty, however, is a closer examination of income by lenders, as millions of Americans have lost their jobs permanently or temporarily due to the coronavirus – and, four months later, companies continue to announce layoffs.
“Instead of verifying employment within 30 to 10 days [before closing], some lenders require an employment verification even up to three days before closing, ”Anderson said. “If there’s any kind of reduced hours, layoff, or time off, the lender obviously wants to catch it just to make sure the borrower can keep making payments.”
What are the fees and costs of mortgage refinancing?
Refinancing a mortgage can be an expensive endeavor, which can add thousands of dollars in fees and costs.
“There’s always a trade-off between interest rate and fees,” says Anderson. “If you want the absolute lowest interest rate, you will have to pay a fee.”
While third party expenses such as appraisals and lender title insurance have to be paid out of pocket, loan creation and closing costs can often be incorporated into the loan.
Folded or not in the loan, the fees can change the homeowners’ calculation on a refinance loan, especially when it takes several years to pay off through lower monthly payments.
“If it takes me a year to get my fees back, it’s pretty easy to refinance,” says Anderson. “If it takes two, three years to capture your fees, then you have to think about it and say, ‘Well, would I really be better off paying these fees two to three years before breaking even?’ And the answer could very well be yes.
What is the impact of mortgage forbearance on refinancing?
In order to refinance a home loan, borrowers must be up to date on their payments. This means that they must make three consecutive payments after leaving forbearance.
“Potentially, a person who took a six-month forbearance three months ago, it could take six months to even be eligible for refinancing,” Anderson says.
He adds that borrowers who leave forbearance early, covering skipped expenses in advance, may qualify for faster refinancing, depending on their lenders’ terms.