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