Is now still a good time to refinance a mortgage?
If you have a mortgage and haven’t refinanced since the coronavirus pandemic caused rates to drop to historically low levels, you should seriously consider revamping your loan before rates rise again.
Yes. Thank you for reading.
But seriously, mortgage rates remain super low for now, though experts don’t expect that to last much longer. A survey recently conducted by Bankrate showed that many homeowners haven’t refinanced, even though doing so could save them money. Black Knight found in its own survey that nearly 20 million Americans were passing up the opportunity.
If you have a mortgage and haven’t refinanced since the coronavirus pandemic caused rates to drop to historically low levels, you should seriously consider revamping your loan before rates start to rise again.
Here are some key things to keep in mind when it comes to refinancing in the current mortgage market.
These low rates won’t last forever
Although 2021 started off with rates hovering near their 2020 records, most mortgage industry watchers think interest will be on its way up again soon.
“We’re going to see a ton of stimulus out of Washington,” said Jim Sahnger, a mortgage planner at C2 Financial Corp. in Jupiter, Fla. “It’s going to be hard to keep a lid on interest rates.”
In 2019, mortgage rates were mostly in the 4% range, but they fell into the 3s and even 2s during 2020. That made mortgage refinancing an attractive option for a huge swath of borrowers. As rates start to rise again, refinancing will make financial sense for fewer people. For now, though, you probably stand to save if you opened your current mortgage any time before 2020.
Jumping on a refi now is especially important if your mortgage has a rate in the 4s.
“It’s a big deal when it comes to people who only benefit from interest rates under 3,” Sahnger said. For those people, “it’s a great time to take advantage of where we’re at.”
Backlogs mostly gone
As rates took a nosedive early in the pandemic, many mortgage lenders saw a flood of refinance applications roll in, which tied up their processing abilities and resulted in closing delays for many borrowers.
Mortgage applications usually provide for a 30-day rate lock, but with some lenders taking 60 days or more to close during the early rush, those delays quickly became costly for borrowers. Many wound up having to pay extra fees to extend their lock or eventually settled for a different interest rate than they were originally quoted.
Now, Sahnger said, lenders have mostly whittled down those backlogs, so closing is happening more efficiently again. The result is less risk and lower costs for applicants.
Even so, he added, it’s important to talk to your lender about how long they expect your application processing to take.
You can avoid further delays by getting all the paperwork you may need in order ahead of time, and being honest with your lender throughout your processing period about any changes in your financial situation that may not yet be reflected in your credit report. That includes alerting them to any new loans, your mortgage going into forbearance, or changes in your employment status, all of which could tie up or even scuttle your application.
Should anyone skip the refi?
“One of the most important things you have to look at is how long do you anticipate remaining in the property or the mortgage,” Sahnger said. “If you think that you’re probably not going to be in the mortgage or the property for longer than three years, it may not make sense for you to do that.”
Said another way: If you’re only a few years out from paying off your mortgage, or you’re planning to move before too long, refinancing might not make sense for you because you may not recoup your refi closing costs before you’re ready to move on from the loan.
On the other hand, every borrower’s situation is slightly different, so it’s important to calculate all the costs and savings for yourself to determine your own break-even timeline.
“I’ve had situations with people sitting out there with mortgage rates in the high 3s, low 4s, sometimes as high as 5%, and they’re recouping their costs sometimes in less than 12 months,” Sahnger said, For borrowers like that, refinancing could still make sense even if you’re planning to move or pay off your loan a few years later.
“You have to look at what the total costs are going to be,” he said.
Don’t just look at your interest savings, either. The cost of your new mortgage includes all the fees you’ll encounter at closing — typically 2% to 6% of your loan’s total value — and those charges will affect your break-even date, too.
Now is a great time for many people to refinance, and the window for savings could be closing on many borrowers before too long.
If you haven’t refinanced in the last year, it’s worth looking around to see how much you might save. Be sure to calculate all your costs and consider how much you’ll need to save to make a refi worth it. And, as always, you’ll definitely want to shop around and compare multiple loan offers before starting the application process. Otherwise, you may wind up leaving money on the table.