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With mortgage rates at near-historic lows during the coronavirus pandemic, if you’re thinking about refinancing, you’re among thousands of homeowners who are wondering if now is the right time to talk to a lender.
To learn about the pros and cons of refinancing your house during coronavirus, we researched current market conditions and spoke with Clint Hammond, a mortgage professional in Columbia, South Carolina, with 16 years experience as branch manager at Mortgage Network.
“It’s always worth talking about refinancing,” says Hammond. “Whether it’s going to make sense enough to conduct the transaction is another matter.”
Why do you want to refinance?
Common reasons why homeowners decide to refinance include:
- Reducing their mortgage interest rate
- Shortening the loan term
- Tapping into home equity
While securing a lower interest rate may seem like reason enough to pursue refinancing, the process isn’t without expense. Just like when you initially purchased the house, closing costs will be involved — usually 2% to 4% of the loan amount.
This can mean that refinancing isn’t always the most advantageous option.
“Factors to consider: Is there a need? Buying a home is obvious: I have to have somewhere to live. Needs to refinance are different,” says Hammond.
“A true need would be, ‘I can’t afford my payment, I have to get it lower.’ Another true need would be, ‘I need cash to address something,’ whether it’s a renovation project, or a large obligation like a medical bill or tax situation.”
The question of whether to refinance can be answered with a good old-fashioned cost-benefit analysis: What is the cost of the transaction itself, and what is the benefit you’ll be receiving from the transaction in how it relates to your timeframe?
The price of refinancing: Don’t get caught up in interest rates
If you’re planning to move within the next year or two, the costs of refinancing may actually cause you to lose money. Similarly, if your loan balance is relatively low, you may be better off sticking with your current mortgage.
“If I have a $100,000 loan balance and I can reduce my rate by 1%, that sounds like a lot, but in terms of real dollars, it won’t reduce the payment by much,” says Hammond, who warns that a portion of the costs associated with refinancing are flat-rate and independent of the loan size.
“If an appraisal costs $425 and a closing attorney costs $495, I’m paying those amounts regardless of whether I’m refinancing $100,000 or $500,000. The dollar for dollar [on these costs] is the exact same, but saving 1% interest on $500,000 is far more substantial.”
Hammond encourages homeowners to talk through the process with a trusted lender and put a plan together that finds the most efficient use of your time and money.
“I hear people say all the time, ‘I’ve got to reduce my rate by 1% for it to be worth it,’ and, well, that’s bogus,” says Hammond. “I don’t talk about refinancing in terms of the interest rate, I talk about it in terms of the cost-benefit. You want to consider the change in the dollar amount coming in or going out each month, in relation to the cost of getting there.”
The same rationale applies if you’re looking to shorten your loan term, remove mortgage insurance, or take out cash from the equity in your property.
“The refinance transaction where you only drop your interest rate by a quarter of a point but you also eliminate your monthly mortgage insurance? That’s a transaction you do all day long,” says Hammond. “That’s going to be a huge dollar figure in terms of savings.”
If you’re looking to shorten your loan — say, refinancing from a 30-year mortgage to a 15-year mortgage — your monthly payment may increase while your interest rate goes down, allowing you to pay down the loan principal more rapidly — if you’ll be in the house long enough for the numbers to make sense.
What’s different about refinancing during coronavirus?
The obvious advantage of refinancing your home right now is that coronavirus mortgage rates are favorable.
“I would say that a significant portion of mortgages issued prior to 2020 are probably worth having a conversation about refinancing,” says Hammond.
Again, it all comes down to running the numbers and making sure that your would-be refinance aligns with your budget and lifestyle plans for the coming years.
The downsides of a coronavirus refinance? Human contact and loan processing delays.
Depending on your personal tolerance for risk, the proximity of others may not be a big concern, but do be aware that despite an increase in virtual transactions during coronavirus, an appraiser will likely need to enter your home, and you may have to be present at closing with an attorney or a notary.
As far as those delays go… well, consider today’s refinancing efforts a practice in patience.
“We have so many deals in our pipeline right now, even deals that are cleared to close and fully ready to go can’t close for at least two weeks because there’s just not enough space on the calendar,” says Hammond.
Beyond the sheer quantity of loans being processed in the U.S. in recent weeks, lenders are also having to tighten up on mortgage eligibility requirements. With millions of jobs lost across the country in the face of the pandemic, it’s unsurprising that mortgage lenders are taking a cautious approach with approvals. Many lessons were learned during the financial crisis of 2008, when banks were playing fast and loose with lending to borrowers with shaky credit or an otherwise high risk of defaulting on their loans.
On a positive note, the Federal House Finance Agency announced on May 19 that homeowners who went into forbearance due to coronavirus will be eligible for refinancing after just three months upon resuming payments, whereas previous guideless prevented the acquisition of a new mortgage for 12 months after restarting payment after forbearance.
Coronavirus or no coronavirus, low interest rates will always pique the interest of homeowners who are keen to explore money-saving options, and the fundamentals of refinancing are the same today as ever: It’s only a good idea if it actually makes sense.
If you’re planning to remain in your house long enough that the reduction in interest rate will recoup and surpass the costs to refinance, great!
If you’re able to drop your mortgage insurance and save a little on interest while you’re at it, great!
But what about making use of your home’s equity? As noted earlier, if you have a sizable repair or renovation project to undertake, this can be a helpful way for your house to essentially cover the expense of its own projects.
If you’re thinking we’re about to mention cost-benefit analysis again, you’ve nailed it.
“Cost of funds is low right now, so it may make more sense to get cash through a refinance than to pull out of savings or a money market account,” Hammond says, “but don’t do it for the heck of it.
“You want to take $50,000 out of the house just to have a cushion during this crazy time; well, what happens if you have to sell in six months or a year and you’ve spent that money and now you’re over-leveraged in the house?”
With a reported 54% of adults not financially prepared for the coronavirus outbreak, the thought of creating a quick, just-in-case emergency fund from your home’s equity can be a comforting temptation.
“It’s not a good idea or a bad idea,” says Hammond. “It’s an idea to be discussed. You hash it out and let the numbers tell you what makes the most sense.”
In short? Do your homework before getting caught up in hypothetical pros and cons of refinancing during coronavirus.
As the coronavirus pandemic continues, information changes regularly. Stay up-to-date on the housing market and mortgage rates with these resources:
Header Image Source: (Haley Carman / Unsplash)