Is the time right to refinance?

Ellen Sinkey PHOTO CREDIT: Contributed

As I write this column, it’s Friday, March 13. Even though it will be nearly mid-April by the time it is published, I believe it’s important to highlight some important events from the past few weeks and how it relates to your mortgage.

I expect much more market volatility in the coming weeks as the Federal Reserve plans to reduce interest rates further.

March, week one:

The week of March 5 was a big one. Freddie Mac released the results of its Primary Mortgage Market Survey, showing the 30-year fixed-rate mortgage averaged the lowest in its survey’s history — which dates to 1971.

The average rate this week was 3.29% compared to 4.41% in 2019. According to data from Black Knight, the drop in rates made 11.1 million Americans “refi eligible.” This means that the borrowers have an interest rate of at least 0.75% higher than the current rate, a credit score of 720 or above and enough equity in their home to get the loan. (Keep in mind, you don’t need a score of 720 to refinance, that was simply the credit score mentioned within the data.)

Fast forward to the week of March 9-13:

The Federal Reserve lowered interest rates this week, but keep in mind — this does not have a direct effect on mortgage rates.

When the Fed lowers or “eases” rates, it’s cheaper for banks to borrow money, which in turn lowers short-term interest rates (such as consumer loans and credit cards, and what banks pay out on savings accounts and certificate of deposits.) Mortgage rates typically follow the 10-year treasury yield, which dropped to an all-time low of 0.318% this week. Due to this drop, you’d think mortgage rates would be even lower this week. Think again.

Due to all-time low mortgage rates from the prior week, refinancing volume hit its highest level since April 2009. This made mortgage rates increase, mostly due to lender capacity.

The chief economist from Freddie Mac, Sam Khater, said in a press release, “As refinance applications continue to surge and lenders work to manage capacity, the 30-year fixed-rate mortgage ticked up from last week’s all-time low. Mortgage rates remain at extraordinary levels and many homeowners are smartly weighing their options to refinance, potentially saving themselves money.”

So should I refinance?

All this said, and depending on where rates are sitting as of when this column publishes, you might be wondering if you should refinance. The answer depends on your short- and long-term goals.

Whether you’re looking to lower your mortgage payment, pay off your loan sooner or cash out some of the equity in your home to pay for improvements or consolidate debt, there are many reasons to refinance.

Here are the top benefits of refinancing:

Save money by reducing payments: Lowering monthly mortgage payments is the No. 1 reason homeowners look into refinancing. Rates don’t have to be drastically lower: A 1% difference can reduce monthly mortgage payments significantly. That said, it’s important to consider how long you might be in your home, then do the math to be sure the monthly savings adds up to be more than the closing costs to refinance. This is something your loan officer can help you with. It’s also important to note that lower payments don’t necessarily mean saving more in the long run. Let’s say you have 20 years left on your mortgage. Even though refinancing can save you money monthly, you likely will end up spending more in interest overall if you extend your term back out to 30 years. Unless getting a lower payment is a high priority, think twice before you extend your term out further than it is.

Paying off your mortgage faster and building equity: Whatever your situation, refinancing to a mortgage with shorter terms calls for fewer monthly payments overall, so you end up paying off your mortgage faster. Typically, your payments will go up when you shorten your loan term, but this is because you are paying more toward principal — which is a great thing.

Going from a 30-year mortgage to a 15-year mortgage, for example, will typically result in higher monthly payments. If that sounds unappealing, consider this: Let’s say that you owe $200,000 on your home. At a rate of 3.5% during 30 years, you will pay more than $320,000 for your home. If you finance the same amount on a 15-year term, you will pay about $244,000 — a savings of more than 20%. Talk to your lender to compare a 15-year mortgage to a 20- or 30-year term. In addition, most lenders will allow you to set up your loan on additional terms, so you can pick the term that works best for you.

Get cash out of your home: If you’ve been making mortgage payments for a few years, or if values in your area have increased, you might have already built up some equity in your home. That’s money that could be put toward a bathroom renovation, a kitchen remodel or a landscaping project. You can use your equity to help consolidate bills or pay down high-interest credit cards.

Make mortgage payments more predictable: Some homeowners initially opt for a shorter-term adjustable-rate mortgage, especially if they don’t think they’ll stay in their home for 30 years. Adjustable rate loans are optimal for lower initial payments, but they are unpredictable, especially when you get to the point in your loan where the rate could change. If you’re looking to stabilize your loan payments each month, consider a refinance to switch from an adjustable-rate mortgage to a fixed-rate mortgage.

Say goodbye to mortgage insurance: On the rare chance that you miss some mortgage payments, mortgage insurance secures the loan from default. Unless you put 20% down when you bought your home, you’re likely making a monthly mortgage insurance payment. If your home value has increased, and the balance you owe has decreased, refinancing might help you lower your mortgage insurance payments or eliminate them altogether. It’s not for everyone, though: Homeowners who qualify for this benefit usually have paid off about 80% of their home’s value.

If you have questions about refinancing, don’t hesitate to reach out to a mortgage loan officer.