All the headlines relating to the coronavirus outbreak aren’t likely to drive many people to think, gee, maybe it’s time to refinance my mortgage.
Turns out, though, it’s not a bad time, especially as fear spreads across the country.
All the added economic uncertainty has been driving investors to seek safety in bonds, sending long-term rates tumbling and contributing to a fall in mortgage rates.
“Right now, it’s all coronavirus all the time,” said Keith Gumbinger, a mortgage expert and vice president at HSH.com, a mortgage information website.
Refinancing a mortgage could save many people money under a variety of scenarios. Is your current mortgage rate 4.5% or higher? Are you looking to engineer a way to pay off the house by the time you retire?
Or have you built up a lot of equity that you could use to make major repairs on the house or pay off other debt?
“When the coronavirus hit, I guess you could say bad economic news is good news for interest rates,” said Bill Banfield, executive vice president of capital markets for Detroit-based Quicken Loans.
“Interest rates fell and really escalated the interest in refinancing even further.”
Banfield noted that 2020 had already kicked off to be a pretty robust year, after the best year ever for Quicken in 2019. He’s expecting that the estimates for the refinancing business will edge up even higher than expected now.
“I don’t think any of us expected to see where rates are right now,” he said. “Really, you have to go back to 2012 to see where mortgage rates were this low.”
Interest rates fell in the spring and summer of last year, given a string of potential threats to global economic growth. Brexit. The trade war with China. Slips in business confidence.
And now the fears that a coronavirus outbreak could intensify in the coming weeks.
The financial fear is that a global health crisis could trigger a global economic crisis if the coronavirus leads to drastic disruptions in production and consumer spending.
The average 30-year fixed mortgage rate was 3.71% during the last week in February and falling, according to Greg McBride, chief financial analyst for Bankrate.com.
Rates aren’t far from the record low of 3.5% that hit briefly more than seven years ago in December 2012. And it’s even possible, McBride said, that a new record low can be set soon, as mortgage rates lag declines in bond yields.
“There are so many unknowns surrounding the coronavirus,” McBride said. “And it is that mystery and uncertainty that is driving market volatility.”
All those uncertainties drove the Federal Reserve policy committee to announce an emergency half-point rate cut Tuesday, two weeks before its regularly scheduled March meeting.
The Fed lowered its target range for the federal funds rate by a half percentage point to 1% to 1.25%. The rate cut is larger than the quarter-point moves the Fed had made in 2019 during previous moves to ease rates.
Consider these questions if you are thinking about refinancing:
Is your mortgage rate higher than 4.5%?
Many say a drop of 1 percentage point in rates is a good benchmark for refinancing. But if you’re planning to live in the house a while – and don’t expect rates to drop even further – a smaller drop in rates can work, too.
Homeowners must take their own life situation into account. Someone who expects to file for divorce in 2020, for example, might not benefit from refinancing if the couple is likely to be selling the house soon.
Low rates, though, shouldn’t be ignored if you have plans to stay put.
Just a year ago, the average 30-year mortgage rate was hovering at 4.54% on Feb. 27, 2019, according to Bankrate.com. The average 30-year mortgage rate was 3.90% in December 2019.
Homeowners who may have taken out mortgages at various points during 2017, 2018 and even early 2019 may have high enough rates to warrant refinancing now to a lower rate, according to mortgage lenders.
“Even people who got them in 2015 or 2016,” said Mat Ishbia, CEO of Pontiac-based United Shore Financial Services.
Consumers always have to do a cost analysis on how much you will pay in fees and closing costs to refinance a mortgage versus how much you’d save over time. If you’re saving $100 a month in lower payments and spending $1,500 in fees, you’re looking at a break-even point of 15 months.
“From our perspective, you’ve got to find a mortgage broker right now to go through that with you,” Isbia said.
Online calculators exist too: A refinance calculator at HSH.com goes through various scenarios.
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Do you want to pay off your mortgage?
Mortgage experts note that homeowners can customize the length of a mortgage when they refinance.
“You don’t have to refinance to a 30-year mortgage,” Quicken Loan’s Banfield said. “You can refinance into a custom loan term.”
While many people couldn’t afford the higher monthly payments associated with a 15-year mortgage, others might opt for a 20-year mortgage.
“If you have had a mortgage for a while and decide to refinance, the 30-year term period may not be the best fit,” said Melissa Joy, president of Pearl Planning, a wealth adviser in Dexter.
“Make sure you’re paying attention to how much you’ll pay over the life of a loan.”
Gumbinger offered this example: Take someone who bought a home in 2014 but did not refinance yet. The original 30-year mortgage was $200,000. And the rate was 4.37%.
The monthly payment was nearly $1,000.
Say the borrower refinances the remaining balance of $177,497. And say the refinance rate will be 3.45% on a 20-year mortgage.
The monthly payment would be a tad more at $1,025 a month. But over the life of the mortgage, the consumer would save about $37,000 after closing costs and fees.
Mike Davis, 53, refinanced the mortgage on his 3,500-square-foot home in mid-February, a week or so before the coronavirus scare triggered a meltdown in the stock market.
His rate dropped from 5.3% to 3.8%.
His payment went up to $2,000 a month, an increase of about $100 a month. That’s because he shifted from a 30-year mortgage to a 20-year product to pay off his $291,000 mortgage quicker and save tens of thousands of dollars in the long run.
Davis said the refinancing process took less than 10 days. He was already a Quicken Loans customer, didn’t need an appraisal and lives in Colorado Springs, Colo., where home values have been climbing.
Davis, a general manager of a Jeep dealership there, said he’s expecting the economy to do well this year but recognizes that the coronavirus and the presidential election year will create some uncertainty for consumers.
“I think we’re going to feel some short-term pain for the next three to six months as this thing works its way through,” Davis said.
He has heard of friends and co-workers canceling their travel plans. Right now, his business is good after a strong February.
“We’re not seeing a lot of people shying away.”
Can you afford a dream home now?
A major difference from a year ago, Ishbia said, is affordability.
When rates fall, it lowers the monthly payment on a relative basis and can make it easier for new home buyers to make that move.
“This purchase season will be the best purchase season in over a decade from an affordability perspective and a great buy for a buyer,” Ishbia said.
“Housing appreciation has gone up but not as fast as interest rates have gone done,” Ishbia said.
No one knows, of course, how long we’ll see an average 30-year mortgage rate well below 4%.
Should things settle down, the bond market will settle down, too.
“The implication for mortgage rates is that borrowers could see a quick rebound in rates when market fears begin to ease,” McBride said.
“If you can save money by refinancing,” he said, “do it now as no one will ring a bell when mortgage rates have reached the bottom and dragging your feet could squander the opportunity.”
Lenders will review your income and your assets. Filing your 2019 taxes soon may help too, as lenders want tax documents, as well.
“Be sure to gather your pay stubs, tax returns, bank statements and other financial documents so you are ready to proceed with refinancing,” McBride said.
“Lenders are getting inundated and the applications that get processed are those that have everything in order.”
Does it really make sense to refinance?
Take time to do your research to see if this is a good move for you.
Understand the closing costs, the appraisal fees and other cost of refinancing. Get a couple of quotes or talk to a mortgage broker. Run a few numbers via online calculators to be sure you’re getting a good deal.
Some consumers might benefit by tapping into their home equity to take cash out to pay off high-cost credit cards. But you’re not in better shape if you just go out and load up on more credit card debt.
“If your mortgage has become your piggy bank, refinancing and increasing the size of your loan with cash out can hurt your financial picture,” Joy said. “Don’t over-rely on debt just because interest rates are so low.”