Fueled by the Federal Reserve’s emergency cuts in response to the COVID-19 crisis, mortgage refinancing has soared to unprecedented levels across the country. These cuts have driven interest rates down to levels never seen before. Now is the right time to refinance your mortgage, especially if you are looking to save money with lower monthly payments.
Mortgage refinances in April 2020 accounted for 65 percent of all loans closed, up from 55 percent in March 2020, and just 51 percent in February 2020 when the COVID- 19 started to spread in earnest. In this article, we will discuss some of the main points that you should consider when applying for refinancing anytime, not just during this pandemic.
Mortgage Interest Rate Volatility
Since COVID-19 took hold in the United States, mortgage interests have been very volatile in the financial markets. The volatility of these rates has forced some banks to place temporary halts on lending, especially for refinancing mortgages. In case the recent rates volatility continues, it might be difficult to refinance your mortgage, and options available today may not be available tomorrow. Therefore, it is in your best interest to get prepared and understand what your options are.
You should have the following documents ready before you apply for refinancing:
- Recent tax returns (at least two years)
- Information for all your recent employers
- Past year W-2s
- Recent paystubs
- Business tax returns, K-1s and profit, and loss statements, if applicable
- Figures for annual property taxes, homeowner association dues, and homeowner’s insurance
- Details on your current payment obligations and debt balances
- Full copies of recent investment and bank statements
Size of Your Mortgage
A majority of creditors are shying away from big loans. Some of the lenders are even not willing to exceed Fannie Mae’s 510,400 conforming loan limit. This means that there are numerous opportunities for smaller mortgages and less for those with larger mortgage balances. Data from original tracker shows that during this pandemic, it now takes a little longer to refinance a mortgage. The average time to refinance a mortgage was 39 days in April 2020, 4 days longer than in March 2020, and 6 days longer than in April 2019.
Is Refinancing My Mortgage A Good Decision?
There are several financial factors that you must consider before you refinance your mortgage. These factors are:
- How Much It Will Cost?
Refinancing a mortgage is not free. There are several costs including title insurance payments, appraisal fees, and lender fees. These expenses should be taken into consideration to make sure that the savings that you experience by refinancing your mortgage outweighs the costs incurred. Each calculation is different, however it usually takes at least 12 months to recoup the costs and, at times, several years.
- How Long Do You Plan to Live in The Property?
Since it can take a year to several years to recoup your refinancing costs, it is imperative to consider how long you plan to stay in your home. If you plan to make the property your retirement home or a home that you plan to maintain ownership for several years, then refinancing it might be cost-effective.
- Will Your Monthly Mortgage Savings Outweigh a Higher Future Debt Balance?
Mortgage payments are usually amortized over the loan’s lifespan. Amortization schedules allocate interest payments heavily towards the beginning of the loan, with bigger principal payments taking place towards the end of the loan. The key takeaway is that you will not be paying down the mortgage as fast if you choose to refinance versus if you decide to keep the current loan. Therefore, it is important to make sure that your monthly savings can outweigh a higher debt balance in the future.
As you can see, there are many factors to consider when deciding whether to refinance your home during the COVID-19 pandemic. While a new, lower rate can save you money monthly, it may end up costing you much more over the life of the loan. Talk to a mortgage professional and take your time to make the right decision for you.