Thinking about refinancing? You're not alone. In the first quarter of 2020, mortgage rates have been on a decline, dipping below 4%, triggering many borrowers to fill out applications to refinance. In the week of March 6, however, the 30-year mortgage rate hit an all-time low of 3.29%, the lowest ever since Freddie Mac began tracking in 1971. 15-year rates have also dropped slightly, from 2.79% to 2.77%.
Needless to say, that jump-started an even bigger surge of homeowners seeking to refinance so they can save a bundle on housing costs.
But then, one week later, mortgage rates jumped back up to 3.36% for the week ending March 12.
Feeling confused? You’re not alone! Let’s take a look at some of the factors behind the fluctuating mortgage rates. Then we’ll talk about when the time is right to refinance.
Why have mortgage rates fallen?
As COVID-19 spread around the globe, worried investors began to take their money out of the stock market and move it into the safety of the U.S. Treasury. Historically, when the yields for 10-year Treasury notes fall, so do mortgage rates. And that's exactly what happened the week of March 6.
For homeowners, this was an opportunity too good to pass up. Banks, however, did not have the capacity to handle the four-fold increase in applicants. According to some reports, borrowers could be waiting as long as 100 days before their loan is processed. In other words, they’re busy. In an effort to constrain the increased refinancing activity, several lenders increased their mortgage rates. So even though the 10-year Treasury note finished at a lower rate than a week ago, it did not have its usual impact on mortgage rates.
If you missed your big refinancing opportunity of a lifetime, will it return, or are you out of luck? That remains to be seen. But before you go dashing off to the bank, it helps to know whether refinancing your mortgage is worthwhile.
To refinance or not to refinance? That is the question
Conventional wisdom tells you that when mortgage rates drop, it’s good for you long-term to refinance. As a rule of thumb, if you can shave a half or full percentage point off your current mortgage, it’s worth looking into. So the first step is to check your current rate, so you can decide if the time is right to refinance, or if you should wait.
The next consideration is how refinancing will impact your financial position. There are two reasons to refinance:
1. To save money on interest in the life of the loan.
2. To lower your monthly payment and increase cash flow.
If refinancing lowers both your interest and your monthly payment, even with the loan costs factored in, you’re golden.
However, let’s say you’re a few years into your 30-year mortgage. While the significant interest savings will be there, your payment will more than likely be higher. That leaves you with less cash every month to spend on other things, like paying for necessities, saving for retirement or building your emergency fund. Consider the difference this will make on your monthly budget. Another thing to think about is your ability to handle this higher payment during a downturn. Let's say you became unemployed or your partner has to take time off work to care for an ailing family member. If the higher payment would be more of a burden during the tough times, refinancing may be more trouble than it’s worth.
Other borrowers may find themselves in a scenario where their payment decreases, but they end up tacking on extra years in mortgage payments beyond the original 30 years. The result is paying more in interest payments over the life of the loan. If freeing up cash flow is a high priority, be sure to weigh that against your overall financial picture. If you’re planning to sell your home before your mortgage is paid off, then taking this step could make a lot of financial sense.
Refinancing online versus face to face with a banker
If you’re doing your homework on refinancing, you’ll find a plethora of online tools and slick ads from online lenders advertising some eye-popping bargain basement interest rates. One thing to be aware of is these online lenders can pull something of a bait and switch — once you’re deep into the application process, you may discover that sweet promotional rate is not going to be available to you.
If you’re thinking about refinancing, crunch the numbers at home with our online calculator and then make an appointment to meet with a mortgage banker at Minnwest Bank. You can talk about your financial goals with a professional, and they can walk you through a number of refinancing scenarios, so you can see a side-by-side comparison on your mortgage costs as well as your payment. They can also review the documents of your existing loan and advise you if there are any financial consequences to refinancing.
Whether you are just getting started paying a mortgage, making extra payments, or planning to retire, a banker can help you weigh your options so you can choose what’s best for your financial goals.
Talk to a Minnwest Mortgage Banker today and find out if the time is right to refinance your mortgage.