Should I Refinance My Mortgage?
The coronavirus has had a profound impact on the American economy on an enormous scale. Mortgage refinance rates continue on a downward trend reaching historically low levels. This means qualified borrowers are able to refinance their mortgage with some of the lowest rates in our economy’s history.
COVID-19 and Mortgage Rates
According to Freddie Mac, the lowest weekly rate on record before this year was 3.31% in 2012. 1In efforts to boost the American economy amidst the COVID-19 pandemic, today you’ll see some of the largest lenders offering rates as low as 2.5%. Of course, mortgage rates vary depending on a number of factors including location, equity, down payment, credit score, etc. But overall, for those currently looking to refinance, now may be a great time to do so.
Keep in mind that a lower interest rate doesn’t necessarily mean that refinancing is the smartest move for you at this time. However, with historically low rates, it’s definitely worth your time to see whether now’s the time to do so. These are some questions you should ask yourself when getting started.
What are the costs associated with refinancing?
The interest rate isn’t the only cost that needs consideration. Closing costs for refinancing include credit and appraisal fees, insurance, taxes, escrow and title fees, as well as lender fees.
Closing costs generally total 2% to 5% of the principal amount of the loan.2 For example, if you borrow $300,000 and closing costs are 3% of that, then you would owe $9,000 at the time of closing. Fortunately, many lenders will allow you to roll your closing costs into your principal balance and finance them as part of your loan so that you don’t have to pay that money upfront.
How long will I stay in this home for?
Time is an important factor when determining if a refinance makes sense. Mortgages are paid over the course of many years, and initially most payments will go towards interest, not the principal balance. Ideally you want to stay in the home long enough where the monthly savings exceed the closing costs. So, if you’re planning on moving within a few years, you’ll most likely not get back the money you put out.
How much will I save?
If you’re considering refinancing your mortgage, the big question you probably have is how much you’ll save. This is where comparison shopping comes into play. Different lenders will quote you different prices, so it’s important to contact multiple lenders to ensure you’re getting the best deal. Another option is using a mortgage broker to obtain a home loan. Mortgage Brokers don’t lend money directly, but act as the middleman between you and possible lenders and work to find you competitive interest rates.
There’s also plenty of refinance calculators online, such as NerdWallet. This will give you an estimate savings by comparing the terms of your current loan to your new prospective loan.
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Are my finances in order?
A recent study from the Lending Tree found that around 75% of mortgage refinance applications were approved in 2018. The top two reason that the other 25% of applicants were not approved was because of their debt-to-income ratio and poor credit.3
A high debt-to-income (DTI) ratio and poor credit history are warning signs to lenders that you may not be capable of repaying the loan. It’s important that you take the necessary steps to improve the health of your DTI ratio and credit score to improve your odds of getting approved. Here are a few ways to do so
- Increase your monthly payments. Doing so will help you lower your overall debt more quickly.
- Avoid taking on any more debt. Avoid applying for any additional loans and focus on savings.
- Recalculate your DTI ratio and credit score on a regular basis and determine your progress. Research has shown that frequently monitoring your credit not only helps you stay motivated, but can also help lead to a higher score. This is because you’ll have more insight on the actions that both help and harm your score.
Insufficient collateral is another common reason for rejection. The value of your property determines how much a bank is willing to lend you. If your property does not have enough equity, a lender will either ask you to reduce your loan, or completely deny your loan.
Archstone is here to help
There’s a lot to consider when refinancing your home. If you’re feeling unsure or even a little lost, you may want to consult with one of our independent financial advisors. They will take the time to understand your unique situation and help you understand if refinancing is a financially sound choice for you and your family.
1 http://www.freddiemac.com/pmms/
2 https://www.bankrate.com/mortgages/when-to-refinance/
3 https://www.lendingtree.com/home/mortgage/best-cities-refinance-approval/?mod=article_inline
Investment adviser representative and registered representative of, and securities and investment advisory services offered through Voya Financial Advisors, Inc. (member SIPC).
Archstone Financial is not a subsidiary of nor controlled by Voya Financial Advisors.
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