By: Chris J. Roe, CPA/PFS
Did you evaluate if refinancing your mortgage saves money? If not, don’t worry. There is still time to take advantage of the low rates.
With coronavirus fears growing, millions of homeowners have been receiving surprisingly good news as mortgage rates continue to hit new record lows.
As of April 16, 2020, the national average rate for a 15-year and 30-year mortgage has fallen to 2.8 percent and 3.31 percent, respectively, with an average of 0.7 points paid, according to data from Freddie Mac.1 This is the third straight week the rates have hovered near all time lowers. While refinancing activity remains robust, the sale of new homes has weakened due to current economic conditions.
However, rates will not stay low forever. So if you save money, you need to take action to secure a new loan and low rates.
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 a 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.
Recently, 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.2 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.3
But then, as March continued on 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 make such a weighted decision.
According to CME Group’s FedWatch, traders are suggesting a 100 percent chance of a rate cut at the Fed’s April meeting, but that doesn’t mean mortgage rates will continue to decline.4 In 2019, mortgage rates fell steadily throughout the spring as investors anticipated a rate cut. It wasn’t until early August that they actually rebounded slightly as banks acted on their interest rate policy.
It’s 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’s 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 You Refinance Your Mortgage?
Taking advantage of today’s low mortgage rates could save you thousands over time, but it may not make sense for every homeowner. According to real estate data and analytics firm Black Knight, it may only be worth the effort if you are able to replace your existing mortgage with one that is at a 0.75 percent lower rate.5 This is because the cost of refinancing can reach a few thousand dollars once you factor in fees for appraisals, title searches, etc.
Black Knight estimated that 14.5 million homeowners would be good candidates for refinancing if mortgage rates fell to 3.25 percent, those of which may be characterized as homeowners with 30-year mortgages who have 20 percent or higher equity in their homes.5 Because payments on a typical fixed-rate mortgage are focused on paying off interest rather than principal in the early years of the loan, it might take a few years to reach that equity threshold if your down payment was lower than 20 percent.
In order to be considered a good candidate for refinancing, you should be current on your existing loan and have a solid credit score. Even when factoring in credit scores and equity considerations, the number of borrowers who would be good candidates for refinancing has jumped dramatically in a short period of time.
All in all, refinancing might make financial sense, even if you purchased a home fairly recently. Millions of homeowners nationwide are currently considered to be good refinance candidates.
2020 All Rights Reserved. This content is developed from sources believed to be providing accurate information, and provided by Twenty over Ten and Rx Wealth Advisors, LLC for general informational purposes only. It may not be used for the purpose of avoiding any federal tax penalties and in no way is meant to provide specific tax, legal or financial advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any advice or security.