The COVID-19 pandemic has had far-reaching impacts on the economy, including the mortgage industry. For many, the idea of house hunting or moving during this time of uncertainty is daunting. At times, it may be practically impossible, especially in areas where stay-at-home orders are particularly strict. In response, the Federal Reserve has taken action. That leaves many who have a mortgage wondering, “Is now a good time to refinance a home?”
The Federal Reserve Decisions and Their Impact
In March, the Federal Reserve took steps to help support the economy and bolster the mortgage industry. Along with two rate cuts, the organization pledged to buy mortgage-backed securities, a move that could promote greater stability.
At this time, the federal funds rate is sitting at 0.25. In comparison, the federal funds rate a year ago was sitting at 2.50.
As a result, banks have the ability to offer lower mortgage interest rates. Between mid-March and mid-April, the fixed-rate mortgage interest rate average fell by about 0.5 percent. While that may not seem significant, it can add up.
For example, if you have a $200,000 mortgage at 4.5 percent, over the life of a 30-year loan, you’d pay over $164,000 in interest. If you locked in a 4 percent interest rate instead, you’d only pay less than $144,000 in interest. That’s a $20,000 difference.
Plus, using the example above, your monthly mortgage payment would go from about $1013 to around $954 (not including insurance, property taxes, or PMI). That’s a reduction of $59.
Ultimately, an interest rate decrease can make a difference, even if it isn’t dramatic. Additionally, it’s important to note that the average mortgage interest rate fell by around 0.5 percent, not that consumers got an average reduction by refinancing of 0.5 percent.
Who Should Consider Refinancing a Mortgage During COVID-19
Deciding whether now is the right time to refinance isn’t easy. However, there are some signs that considering it could be a wise move.
First, if your career has remained stable during the pandemic, that plays in your favor. Usually, you need to have been with your current employer for a specific amount of time to qualify for a mortgage. Typically, that’s two years for conventional and FHA loans. Anyone who has found themselves suddenly unemployed or had to get a new job may not be able to refinance.
Second, you need to have a strong chance of securing a better interest rate. In most cases, that means having a current interest rate at least 1 percent higher than what you can reasonably expect to receive. Your credit score and report would need to be comparable to or better than what you had when your original mortgage, as well.
Now, having a similar or better credit score doesn’t guarantee a better rate, or that you’ll even qualify. Some lenders are being cautious due to the pandemic, tightening their lending activity in response to these uncertain economic times. However, it does increase your odds significantly in today’s climate, especially if that’s coupled with a strong income and longevity with your employer.
It’s also important to realize that, if you have an adjustable-rate mortgage, it may be smart to explore fixed-rate options during the pandemic. That way, you can snag a stable rate while they are lower, ensuring you won’t get hit with an interest rate increase once the economic recovery begins. However, all of the points above still apply to your situation, so keep that in mind.
How to Refinance During COVID-19
The process of refinancing isn’t dramatically different now, in comparison to what was required before COVID-19. You’ll go through the mortgage process, including submitting an application, providing key documents and proof of income, and submitting to a credit check.
All of these steps can be completed online, so you don’t have to go to a lender in-person at any point. However, if you do need assistance face-to-face, you might have to schedule an appointment in advance, as many banks and credit unions still aren’t seeing walk-ins.
In many cases, shopping around is a smart move, just as it usually is when there isn’t a pandemic. Since fewer people are shopping for mortgages, competition is increasing. You may be able to find deals by exploring multiple options, including lower interest rates and fees or bonuses and freebies.
Gather Information From Multiple Lenders
You can gather information from multiple lenders and apply to more than one to compare their offerings. If you do them in a batch, only one inquiry will show on your credit report, so it’s wise to do them all close together. Then, you can review the documents and figure out which option is best for you. Or, if you don’t like any, you can always choose not to move forward.
Ultimately, you have options. Plus, there’s no penalty for looking. Until you submit to a hard pull on your credit, your credit score won’t see any impact. So, consider looking at what different lenders are offering and see if now is a good time for you to refinance.
Do you think now is a good time to refinance a home? Do you think waiting is the better choice? Share your thoughts in the comments below.
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