No one can accurately predict how long COVID-19 will continue to disrupt our lives, jobs or the economy at large. Whenever there’s that much uncertainty, mortgage rates can be volatile.
That volatility has many asking whether this is a smart time to refinance your home or condo. There’s no crystal ball, so when the timing is right, you want to be prepared to act fast. That means evaluating whether refinancing is right for you long before you have to make that important decision.
Refinancing during COVID-19
Interest rates for 30-year fixed-rate mortgages are currently at historic lows. Usually, that would cause prospective homeowners to be out house hunting and meeting with lenders to get pre-approved. But many Americans are reluctant to leave their homes during the COVID-19 pandemic. And the low inventory of homes for sale, an issue well before COVID-19, also affected the homebuying process. Because of this, new home sales and the mortgages that go along with them, have stalled significantly.
However, when interest rates dip, more and more homeowners think about refinancing. In fact, according to the Mortgage Bankers Association, refinancing is currently up 192% over this time last year. This can probably be attributed to widespread anxieties over potential income loss and the ongoing ability to make monthly payments during the pandemic. Without an end in sight, refinancing may be a way to reduce payments or tap into equity already invested in the home.
The truth about refinancing your mortgage.
In general terms, mortgage refinancing is the process of replacing one existing home loan with another. Usually, the new loan will be for the same amount but with a shorter loan term and at a lower interest rate. Often it’s all of those things at once.
One common misconception is that refinancing is only for homeowners with jumbo mortgages, or with many years remaining on the loan. While that scenario makes sense for many, there are plenty of other circumstances where mortgage refinancing benefits add up.
Let’s look at some common concerns about refinancing in the age of COVID-19 and see which ring true and which don’t.
Refinancing makes sense if I’m keeping my home a bit longer.
- TRUE: Knowing how long you plan to keep your home will help you judge whether refinancing makes sense. When speaking with your mortgage servicer or loan officer, try to get a feel for the time it will take to recover the refinancing cost. Start by understanding how low your monthly mortgage payment will drop. Then, ask about your projected closing costs. Let’s say your monthly payment decreases by $100 (that’s $1200 a year), and closing costs are $5000. It would take 50 months — just over four years — to break even. If you’re thinking of selling your place before then, it probably doesn’t make sense to refinance. But if you stayed put for ten years, you’d be looking at $7000 in total savings ($12,000 in reduced payments over ten years minus $5,000 in closing costs = $7000.)
I can tap into my home equity to pay my bills.
- TRUE: Replacing your old home loan with one that’s higher than your current mortgage balance — and withdrawing the difference — is called a cash-out refinance. That money, which is essentially your home equity investment, can be used for whatever you like: Home repairs, consolidating debt or a safety net for an unexpected drop in income. Just remember, there may be limits on how much you can withdraw. Cash-out refinances typically won’t allow you to tap more than 80% of your equity, so ask your lender to run the numbers for you.
Refinancing doesn’t affect my credit score.
- FALSE: When you apply for a refinance, your lender will want some assurance that you’re not a risky borrower. They’ll perform a “hard inquiry” on your credit which will cause a slight and temporary hit on your credit score, regardless of whether or not you move forward. If the refinancing goes through, you’re basically starting a brand new loan with no payment history (an important component of your credit score). Once you prove your ability to repay, your credit score should return to where it was before refinancing, but it’ll take some months of prudent, on-time monthly payments. And while some credit reporting agencies do look at previous payment histories for some time after closing an account, they’ll influence your credit score to a much lesser degree.
Refinancing can help me pay my mortgage off sooner.
- MAYBE. When you refinance, you start a new loan from scratch. So if you are in a 30-year loan and you refinance to another 30-year loan, you’re merely adding more years of mortgage payments. To pay the loan off sooner, you’d need to reduce the term of your mortgage by switching from your 30-year loan to one that would last, say, 15 years. Even with a lower interest rate, you’ll probably incur higher payments each month, but you’ll save on interest over the life of the loan and pay it off sooner.
I haven’t owned my home long enough to refinance.
- DEPENDS: If it’s been less than a few years, you probably don’t have enough equity built up to do a cash-out refinance. If your main goal is to reduce monthly payments, the new interest rate would have to be significantly lower to justify paying another round of closing costs. Do the math, but consider that if you can shave off at least one percentage point by refinancing, it’s at least worth looking into.
Refinancing during COVID-19 is impossible with social distancing.
- FALSE: The coronavirus pandemic has impacted nearly every business there is, including real estate closings. Until people are more comfortable leaving their homes to head to a lawyer’s office to sign closing papers or let a notary into their home, closings will be challenging — but not impossible. Some attorneys ask clients to remain in their cars while signing the papers, which are then passed through the car window and stamped by a notary watching from a safe distance. Additionally, many states are beginning to allow eClosings — a sort of virtual signing. Remote Online Notarization is now allowed in 37 states, either permanently or as an emergency effort during COVID-19.
I can reduce mortgage payments even without refinancing.
- TRUE: It’s called forbearance, and the terms can vary depending on the type of mortgage you have, how long you’ve been paying it off and why you feel the need to reduce your monthly payments. If you’re having a personal hardship — perhaps you got furloughed from your job or you’ve been sidelined with health issues — mortgage forbearance can reduce your monthly payments or suspend them altogether for a short time. Note that payments missed through forbearance are not forgiven; they’re deferred. You’ll still owe that money. Also, ask your lender if forbearance will keep you from opportunities to refinance down the road.
Is it worth it to refinance?
It’s a very volatile market right now, especially with large portions of the economy struggling. But refinancing is possible. And it’s absolutely worth it if the terms are right! To get started, read more on what to consider before refinancing, take a look at our refinance products, or, if you’re ready, you can always apply online.
Refinancing can be an easy, straightforward process when you work with an experienced mortgage professional. Search for a local loan officer near you to discuss your options.