Interest rates were already low, but with the coronavirus creating economic slowdowns, massive layoffs, and a decline in the overall market, rates have dropped even further. As interest rates fall, homebuyers can get a mortgage with historically lower rates, making this (foe many people) a good time to buy a home and fine time for refinancing.
Many people can take advantage of these excellent rates, including current homeowners, who can refinance to secure lower monthly payments.
Of course, low interest rates do not mean that refinancing is right for everyone, but it could indicate that the time is right for you.
Record-Low Interest Rates Make Refinancing More Attractive
Early this week, MarketWatch reported that interest rates have fallen to new all-time lows. In their article, they noted that interest rates averaged just 3.13% for a 30-year fixed-rate mortgage, down eight “basis points” (one one-hundredth of a percent) from the week before. Previously, the record low was 3.15%. A year ago, rates were low but not this low. Homes averaged around 3.85% interest just 12 month prior.
15-year mortgages often have even lower interest rates. Although the monthly payments for a 15-year loan are higher, the average rate for these loans was 2.58% according to MarketWatch.
Since the coronavirus crisis took hold of the United States in March, economic activity (including real estate and mortgage transactions) slowed, leading to a drop in interest rate. At the time, it was a new record low, and it triggered a windfall of refinancing at a time when lenders were transitioning to remote services.
The market seems to have settled, however, and lenders are steadily adapting to the coronavirus working environment. Most lenders can serve their clients remotely, allowing buyers and homeowners to get the services they need without significantly increasing the risk of spreading the disease.
For current homeowners, these low interest rates bring up an important question: should you refinance?
Note: Above Interest Rates are Averages Only
The interest rates cited above are averaged calculated by various sources and do not reflect the interest rate on your refinance or purchase loan. The interest rate on your loan could be higher or lower depending on the lender, the product, your credit score, downpayment, and many other factors.
Will the New Records Stand?
It appears the market is at a turning point, and could go one of two directions. First of all, it’s entirely possible that another virus scare could create yet another lockdown, leading to reduced economic activity and even further declines in interest rates. The other possibility, one that seems just as likely (if not more so), is that the market begins to see an upward trend. Even with viral spikes in different regions, businesses are reopening and people are getting back to their somewhat-normal lives. The activity will inevitably lead to a rise in interest rates.
If you are considering refinancing, it seems entirely possible that these low interest rates will not stand for long. Within the next month or two, we could see more economic growth, leading to higher interest rates.
The window for low-interest-rate refinancing could slam shut before many homeowners even realized it was a possibility.
With Lower Interest Rates, the “Break Even” Comes Faster
There is no official line, number, or stat that can tell all homeowners exactly when they should refinance. However, homeowners should consider their “break even” point. This is simply a term used to define when a person will recoup the money they spend refinancing their loan. Generally, someone should consider refinancing if they can secure an interest rate that is at least a half of a percent lower than your current interest rate.
By lowering the interest rate, you will have a lower monthly payment. However, savings don’t come right away; because of loan costs and fees, it often takes a few years to fully recuperate the expenses.
To fully understand whether a loan is right for you, you need to crunch the numbers and calculate when you will break even. But don’t be scared off by closing costs and other fees. Paying these costs upfront can make refinancing seem more expensive, but you’re simply trading upfront costs for longterm savings. Not refinancing seems like the more affordable route, but if you have a high interest rate with decades left on the loan, you could benefit from a new mortgage.
What to Expect When Refinancing in the COVID-19 Economy
Interest rates are not the only aspect of the mortgage industry that have been changed by coronavirus and COVID-19. There have also been rapid changes to the qualification process, with, because of layoffs and reduced incomes overall, more strict requirements for securing a loan.
Millions of Americans have lost their jobs, either permanently or temporarily, as a result of the coronavirus response. To deal with this issue, many lenders have tried to reduce risk by increasing the requirements for taking out a loan. For example, numerous lenders have raised the downpayment requirements for certain loans, while others are now only making loans to people with higher credit scores.
When you look to refinance, this reality may be felt in your application. Interest rates may be low, but it’s possible that some lenders will require much higher credit scores or total equity in the home in order to qualify.
Signs are trending towards the positive, but a full economic recovery is far from certain. For this reason, lenders are cautious and you need to be prepared for this reality when you apply.
Is the Time Right for You to Refinance?
While market conditions may be ideal for refinancing, the decision should still be based on individual factors, including your current interest rate and the amount of payments left on your loan.
For more information on refinancing, or for assistance calculating your break-even period, contact the staff at San Diego Purchase Loans today. Despite all the changes to the mortgage industry, we will still use our common-sense approach and high-quality personal service to increase your chances of loan approval!
