Time to Refinance Your Mortgage!

For those of you lucky enough to be debt-free, congratulations! You can stop reading. For the rest of us with a mortgage (or two), now is the time to consider refinancing. While rates have been relatively low for quite some time, COVID-19 has driven rates to historic lows. According to Freddie Mac, the 30-year fixed-rate mortgage averaged 2.96% this week. The 15-year fixed-rate mortgage averaged 2.46%.

Mortgage Rates: A Perspective

Most Americans understand that we are in a low-interest-rate environment. But do we realize just how low? And do we know why? Thanks to Freddie Mac data, we have historical mortgage monthly interest-rate averages dating back to the 1970s. For example, Freddie Mac rates on 30-year fixed-rate mortgages ranged from 7+% in the early 1970s to 11+% in the late 1970s. Hard to believe given today’s rates. Even more unbelievable were rates in the 1980s, when rates climbed to more than 16%!

Rates improved during the 1990s and 2000s. Then came the financial crisis of 2008. In response, the Federal Reserve slashed rates so that banks could keep their borrowing costs low and in turn, keep their mortgage rates low. Very low.

Which brings us to today. While the coronavirus crisis is much different than the Great Recession, it is similar in that the Fed has yet again reacted by slashing rates to encourage borrowing.

Refinance?

Interest rates drive most refinance decisions. However, there are other variables to consider before moving forward with a refinance:

• Closing costs: Be sure to get a quote from your mortgage lender that summarizes the rate and estimated closing costs associated with the proposed refinance. Formerly known as a Good Faith Estimate, this document is now referred to as a Loan Estimate. Examples of expenses reflected on this form include origination fee, appraisal, closing attorney, title work, etc.
• Planned stay in your home: No one ever truly knows, but if it is likely that you will be living in the same home for years to come, then it often makes sense to refinance to a lower rate. Be sure you live there long enough so that your lower payment allows you to recoup the refinance closing costs. Moreover, choose a mortgage structure that best suits your time horizon. For instance, soon-to-be empty nesters with downsizing on their minds may prefer a shorter-term ARM (Adjustable Rate Mortgage) product that locks in the rate for a shorter period but often has a lower rate than 30-year fixed mortgages.
• Underwriting approval: Your financial information may have changed significantly since the last time you applied for a mortgage. While your net worth may have increased, a reduced income can make it more difficult to get approved by the mortgage company’s underwriters.
• Loan amount/home equity: Lenders may offer more attractive pricing for borrowers with more home equity. If your home equity has increased significantly since the last time you refinanced, then that could be another reason for refinancing. And home equity does not need to happen organically. Some homeowners may create equity by making lump sum principal paydowns on their mortgage balances. Loans under $510,400 are considered conforming loans (as opposed to jumbo loans) and may receive a lower interest rate. Additionally, regardless of the loan amount, banks may provide better pricing for lower loan-to-value (LTV) ratios. LTV is calculated by dividing your outstanding loan balance by the market value of your home. For instance, a mortgage with a 65% LTV may receive a lower rate than a mortgage with an 80% LTV.

Loan Modification vs. Refinance

As you might imagine, mortgage lenders are overwhelmed with refinance requests because of our historic low interest rate environment. So much so, it may take close to 90 days to close on your refinance. Before you lock into a refinance, ask your current mortgage company if it has a loan modification program. Many lenders are rolling out just such programs to reduce their refinance bottlenecks and to keep mortgages on their books. Advantages of a loan modification (as compared to a refinance) include no closing costs, no-to-low documentation requirements, and quick turnarounds. Not all loans are eligible for loan modifications, and it is difficult to determine if your loan qualifies without contacting your mortgage company. It is also important to compare the bank’s modification offer with a current refinance quote. While modification rates should be lower than your current rate, they may not be as low as what you could receive via a full refinance.

In summary, we are witnessing historically low interest rates. As a result, mortgage holders should check with a mortgage lender to compare their existing mortgage loan structure with current rates and terms. For many borrowers, refinancing will make sense. However, interest rate is not the only factor to consider. Proposed closing costs, planned stay in your home, underwriting approval, and possible principal paydowns can also impact the refinance decision. And refinancing is not the only way to lower your interest rate. Banks are also rolling out their own loan modification programs. Please let us know if you would like to discuss the mortgage refinance decision. As always, thank you for choosing Bragg Financial Advisors.

This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.