Mortgage Refinancing: How the Market Downturn Has Provided an Interesting Opportunity

Time to Read: 8 Minutes

As coronavirus concerns continue, millions of homeowners have been receiving surprisingly good news as mortgage rates continue to hit new record lows.

Last Month, the national average rate for a 30-year mortgage fell to 3.33 percent, with an average of 0.7 points paid, according to data from Freddie Mac. Mortgage rates have plunged back to the lowest levels in decades, yet overall mortgage applications were down 17.9 percent in the week ending April 3, 2020, according to the Mortgage Bankers Association.

Why Are Mortgage Rates Falling?

Since March, COVID-19 concerns have ignited volatility in the stock market. At the same time, bond markets have rallied as traders rush to purchase safe-haven assets such as U.S. Treasuries, which are backed by the United States government and are considered safe havens even in tumultuous economic climates. Since investors are really competing to lend the government and other borrowers money, such bond prices rise, causing interest rates to fall.

In April, yields on the 10-year Treasury note fell to a historic low of 0.676 percent, extending their break below 0.7 percent for the first time ever. While that means lower borrowing costs for the government, 10-year Treasury notes are the key benchmark for 30-year fixed mortgage rates, having a direct impact on their performance.

For the larger part of 2019, mortgage rates fell as U.S. economic growth waned and investors began to predict that the Federal Reserve would cut benchmark short-term interest rates. But, in the fourth quarter, rates rebounded slightly before sliding sharply again this January. As of March 6, 2020, the average 30-year rate fell to an all-time low of 3.29 percent, and mortgage applications jumped 30 percent from the week prior, according to the Mortgage Bankers Association.

But then, as March continued and the COVID-19 pandemic worsened, demand for refinance loans dropped, reversing the previous weeks’ surge.

What to Expect Moving Forward

Because mortgage rates have been sliding, you may be considering whether to refinance your loan. In short, no one really knows how interest rates will react as we continue to face the COVID-19 pandemic and the future ahead, which can make it difficult to come to such a weighted decision.

Although the Federal Reserve already cut rates to zero in response to the COVID-19 Pandemic, this does not mean mortgage rates will continue to decline. In 2019, mortgage rates fell steadily throughout the spring as investors anticipated a rate cut. It was not until early August that they rebounded slightly as banks acted on their interest rate policies.

It is possible that Treasury rates could continue to fall further, especially as fears associated with slowing global economic growth increase. But while nothing is preventing mortgage rates from falling further, another notable decline would place them in truly uncharted territory. It is important to keep in mind that things continue to change at a rapid pace. So, if you are considering refinancing, crunching the numbers now is a good idea.

Should I Refinance My Mortgage Now?

As we previously wrote, many homeowners might be able to benefit from refinancing their mortgages while mortgage rates hover around historically low levels. However, it is easy to think that refinancing to a new mortgage with a lower interest rate is a financially smart decision, but it is important to remember that there are several factors to consider. Here are some common variables to think about:

• Can you save on your monthly payment, and lower your rate or your total interest paid?  A good starting point when considering refinancing your mortgage is to check with a lender or mortgage broker on what is available in the marketplace. They will be able to provide you with the specific details of what is available to you based on some key assumptions around your property, income, and credit. You can then use that data to see if you could save on your monthly payment, lower your interest rate, lower the total interest paid for the loan, or, in an ideal scenario, all three of those.
• How long will you stay in your home, and how long will you keep your mortgage?  If there’s an upfront cost for refinancing—whether it’s out of pocket or added to your loan balance—you will want to make sure you plan on staying in your home long enough for the monthly savings to “break even” with costs to refinance. If you are planning on staying in your home in the long term, then the opportunity to possibly save a few hundred dollars a month over the next 30 years can be well worth the time and energy to refinance.
• How much will a refinance cost?  When trying to determine how much a refinance will cost, make sure to request a loan estimate from your lender, and don’t be afraid to shop around, especially if you have a larger “jumbo loan.” We have found that rates and costs tend to vary more across lenders for jumbo loans, as banks have different risk appetites.  A general rule of thumb is that if a .50% interest-rate reduction is available, the cost of refinancing becomes much easier to justify for most loan sizes and maturity dates. But there is also no set line in the sand to suggest that a certain interest-rate reduction is beneficial to all homeowners with a mortgage.  Once you have the cost, you can run a break-even calculation with Stratos Private Wealth (for a more complete version), or there are many online “break-even calculators” that are free to use.
• What is the “age” of your current loan?  The age of your loan is another key factor when considering a refinance. It is important to understand that refinancing your loan resets the timeline and amortization schedule of your monthly payments, thus extending the loan’s maturity date and changing the allocation of principal and interest associated with each monthly payment.  This is important because although your new monthly payments can be much lower, that does not necessarily mean you are saving money. The reason your monthly payments are lower is because you are stretching them out over a longer period. If a refinance extends the life of your mortgage another 5–10 years, you may have actually increased the total amount of interest you’ll pay over the life of the loan, even though you’ve lowered your interest rate.
• Other considerations—changing terms, consolidating other debt, and what to do with money saved.  There are a few other considerations that can help you not only assess a refinance opportunity, but allow you to be more strategic about your options:
  • Could you benefit from not only a lower interest rate, but possibly a shorter loan?
    We’ve seen clients able to refinance loans originating only a few years earlier but between the rate reduction and lower principal amount due to payment, they’re able to move into a 15-year loan, paying only slightly more per month but paying off the loan years earlier than planned.
  • Have you considered a variable rate?
    Variable-rate loans, often referred to as adjustable-rate mortgages (ARMs), can be a strategic option for owners who might not plan to hold their properties for the long term.
  • Can you consolidate other, higher, interest debt?
    There might be opportunities to consolidate other outstanding debts, such as high-interest credit-card debt, when refinancing your mortgage. You end up owing the same amount, but you pay off high-interest credit-card debt and replace it with lower-interest mortgage debt.
  • How can you leverage the extra money you will save on the new mortgage?
    We always recommend having a strategy for what to do with the extra money you will have in your pocket. One strategy that has been successful for Stratos Private Wealth clients is to continue making the same mortgage payment that you had prior to refinancing, allowing you to pay off the loan even faster. There are many other strategies that could be implemented, depending on your specific goals and priorities. Some other common examples we frequently see include increasing retirement savings, building up an emergency cash reserve, donating to charity, spending more on travel, and much more.

Other FAQs When Considering a Refinance

We recently caught up with San Diego–based loan officers Scott Morse and Kristen Livingston of Residential Wholesale Mortgage to get their take on questions they are frequently asked. Here’s what they had to say:

• Will a refinance impact my property-tax value?
  No, a refinance should not change your current property-tax value. Be sure to confirm this with the lender you decide to work with.
• Can I get an appraisal waived?
  It depends on the loan size, origination date, equity in the home, and what institution the loan is with. The appraisal can add to the cost to refinance, so it is certainly worth asking about.
• Can I qualify for a mortgage refinance without earned income?
  Retired individuals with no W2 income may still qualify for a refinance. Lenders may be able to provide “bank statement” loans for retirees and individuals who use their investment accounts to supplement their income in retirement.
• Are rates accurately advertised, particularly in the current interest-rate conditions?
  You may find that advertised mortgage rates are higher than expected right now (March 2020). Market factors have caused a surge in applications, which has exceeded lenders’ capacity levels and therefore impacted displayed rates. Be sure to check directly with lenders for their rates.

Still Have Questions? 

Ask Stratos Private Wealth! Please let us know if you are interested, and we will take a holistic view to help you evaluate how a mortgage refinance impacts your entire financial equation.