The Federal Reserve recently announced that it plans to raise interest rates and ease bond buying in the coming months, measures it has put in place to support the economy during the pandemic. This could mean that the days of historically low mortgage rates – below 3% on the popular 30-year fixed loan – are numbered.
There are already signs of rising rates. Mortgage buyer Freddie Mac reported Thursday that the average rate on a 30-year mortgage rose to 3.05%, from 2.99% last week.
So, does that mean you should rush out and refinance your mortgage by the end of the year?
Let’s first look at why rates have fallen so much this year, fueling the refinancing craze.
Rates can go up and down for a number of reasons, including 10-year Treasury bill yields, the stock market, and the jobs report. But the main driver behind the low rates is the Federal Reserve, which has invested trillions of dollars in mortgage-backed security bonds to keep the housing market strong during the pandemic.
Over the years, the 30-year fixed rate has varied considerably. It was at its highest level in 1981 – 16.63% – when the Federal Reserve raised it to dampen hyperinflation. It was 6.97% 20 years ago and 4.45% 10 years ago.
Like other homeowners, you’ve probably been inundated with promotions from lenders offering to save you hundreds of dollars a month by refinancing your mortgage at a lower rate. You may be wondering if you are a good candidate for refinancing and if so if now is the right time to do it.
When is it beneficial to refinance?
“If you can lower your mortgage interest rate from 0.5% to 0.75% and if you plan to stay in the house for more than three years, then it makes sense to consider refinancing,” says Greg McBride, vice – senior president and chief financial analyst. for Bankrate.com.
There is a break-even period and it varies depending on the loan. Typically, after three years, you start to reap the rewards of refinancing. Ask yourself, “Are you going to stay there or own the house long enough to take advantage of the refinance?” Said Joel Kan, associate vice president, economic and industrial forecasting, at the Mortgage Bankers Association.
Another key factor is the cost of refinancing. “There are a number of entities that have their hands in your pocket,” says McBride. There may be lender fees such as set-up fees, application fees, and also third-party fees such as appraisal fees, title work fees, local and state government taxes, and registration fees. ‘registration. “See what other than rate is added to the mix,” says McBride. Most often, borrowers factor these costs into the loan amount.
Other reasons to refinance: To take money out of your home for debt consolidation or to complete home improvement projects, or to change the type of loan you have. For example, if you have an adjustable rate mortgage, you may prefer to replace it with a fixed rate loan so that you don’t face larger monthly payments if the rate increases after its initial fixed period.
When is it best to delay refinancing?
If the rate you have is close to 3%, it may not be worth refinancing, especially if you are not sure how long you plan to live in or keep your home.
“The rate may not be low enough,” says Kan. “Refinance when there are enough advantages to refinance. Are you withdrawing money? What is the lowest possible rate? If you are moving and selling your home in the near future, in a year or so, you may not want to refinance. Factor in the closing costs and term of the loan as well as the rate.
There are many calculators online that allow you to calculate your potential savings by entering the new loan amount, rate, and loan term, like the one offered by Fannie Mae. “If it’s a bigger loan amount, even if you get a rate cut,” it may not be worth it, says Kan. “Your savings depend on the amount of the loan and the drop in rates. Small loans need a larger rate cut to generate savings.
The average home loan size is $ 300,000 to $ 400,000, according to Jonathan Lee, senior manager of Zillow Home Loans.
Other reasons to delay refinancing are: If your financial situation has changed or deteriorated, says McBride. Another reason is that you aren’t saving on total interest over the life of the loan or on your monthly payment.
What are the main obstacles to refinancing?
Loss of income due to lack of work, a declining or too low credit rating, and a high debt-to-income ratio can keep you from refinancing.
The debt-to-income ratio is your total debt each month compared to your monthly income. An optimal debt-to-income ratio is less than 36%, says McBride. This means that your debts – including your monthly mortgage payment, monthly maintenance fees or common charges, taxes, home insurance, credit cards and car loans – should not exceed 36% of your salary. raw.
Some business owners may have difficulty refinancing. It may be more difficult to qualify for a mortgage if you have 1099 tax income from a sole proprietorship, for example, rather than W-2 income as an employee.
Still, “you can have good credit without traditional sources of income,” says Kan. There are credit models that reflect non-traditional income.
What else should I be aware of?
Closing costs: There are costs associated with refinancing a loan, and they are usually lower than when you buy a home. When you buy a home, closing costs can range from 2% to 6% of the loan amount, depending on the lender’s estimate.
For a refinance, the average closing costs were less than 1% (0.87%) of the loan amount, excluding tax, according to a report from ClosingCorp, a San Diego company that provides data on closing costs for the loan. residential real estate for mortgage and real estate. service industries. Including tax, the average cost of refinancing was 1.29% of the loan amount.
Estimates of closing costs vary by state and municipality of the home. Yet, since the cost of closing a loan can include state and local taxes, ask what is included in the term “closing costs”.
According to ClosingCorp, the average closing costs for a single-family home in 2020 were $ 3,398 taxes included and $ 2,287 excluding taxes. ClosingCorp’s refinance calculations include the lender’s title policy, appraisal, settlement and registration fees, as well as various state and local taxes.
Some states require an attorney to review closing documents. If necessary in your state, this would add attorney fees to your closing costs.
Lender credits: In short, credit lenders can eliminate some or all of your closing costs. Sometimes a lender will offer lender credits to cover the cost of closing your loan or you can talk to them about it. Loans from lenders can raise your mortgage rate by a fraction such as 2.875% or more from 2.75%, but they don’t always increase your rate.
One downside to getting lender credits would be if lender credits raise your mortgage interest rate and charge you more interest over the life of your loan compared to a lower mortgage interest rate and some closing costs built into the loan amount.
The ability to obtain lender credits depends on your loan-to-value ratio, which is the amount you borrow relative to the property’s value, the interest rate, and the lender’s willingness to offer these credits as incentive to do business with you.
Points: One point is 1% of the loan amount, and lenders may offer you a lower mortgage rate but with a fraction of a point or points attached. Make sure that when you compare rates, you are comparing the actual rates and any points associated with each rate offered by different lenders.