By Derek Doke, CCIM
Amid unprecedented levels of uncertainty and volatile swings in the stock market, it is easy to feel out of control. However, despite the chaos, there are steps you can take to improve your financial standing and exert a degree of control over an otherwise unsettling situation.
One such opportunity is mortgage refinancing. Switching to a loan with a lower interest rate could reduce your mortgage payment and set you up for long-term savings. However, to get the most out of this opportunity, you must watch the market closely and know when to proceed.
What does mortgage refinancing mean?
Refinancing your mortgage allows you to pay off an existing loan and secure a new one. By doing so, you can choose a program with better terms and a lower interest rate. For example, switching from an adjustable-rate mortgage to a fixed-rate plan at a lower rate might be a more fiscally responsible option for you and your family.
What are mortgage rates?
Mortgage rates, which track long-term Treasury bonds, determine the amount of interest you pay on the loan. Expressed as a percentage, such as 3.7% or 4%, rates are based on your credit profile and market trends.
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How does the market impact mortgage refinancing?
In recent months, the country’s mortgage rates have been extremely volatile as the market responds to a global crisis. As a result, the Federal Reserve cut its short-term borrowing rate to zero.
The short-term rate that the Fed controls—and recently cut—is one that banks and other depository institutions use when lending to each other. While this interest rate influences short-term consumer borrowings, such as credit cards and home equity rates, it does not directly impact mortgage rates—especially fixed-rate mortgages.
The last three times the Fed cut its short-term rate, mortgage rates increased. This happens for a variety of reasons, one of which being that the rate cut is anticipated or “baked in” to the market. However, these reactions are typically played out immediately following a rate cut and can fluctuate over time.
Should you refinance your mortgage?
With the added uncertainty of today’s market, making big life decisions, such as refinancing your mortgage, can feel overwhelming. Here are four tips to help you navigate the process more effectively:
- Be prepared: Have a loan application completed and ready to go with a mortgage broker or lender. Taking this step allows you to proceed without delay when the time is right.
- Wait for the best rate: In general, refinancing options that reduce your rate by 0.50% or more are worth pursuing.
- Calculate potential savings: Once you have a rate you like, calculate how much you will save each month and divide that into the cost of the refinance. For example, if it costs $2,400 to refinance, and the lower rate saves you $200 per month on your mortgage, it would take you one year to break-even ($200 x 12 = $2,400). As long as you plan to be in your home for that length of time or longer, it makes sense to proceed.
- Lock in a rate: If the savings are worth pursuing, lock in the rate as quickly as possible. In general, rates can be locked for 30 to 60 days. However, this time frame varies between lenders.
How mortgage rates apply to your situation
Should you refinance your mortgage based on current interest rates? Whether you are looking to buy, close on a home, or refinance, changing interest rates can significantly impact your options. However, refinancing may not always be a smart move.
Here are five common scenarios and advice on how best to approach rates:
- You are thinking about buying a home and applying for a mortgage: Base your decision about whether to buy a home on your personal and financial needs, not on market fluctuations. If you decide to buy a home during a period of low interest rates, consider it a bonus. If you decide to buy a home during a period of higher rates, you can always refinance later date for a more favorable rate.
- You are refinancing your current mortgage: Focus on completing your loan application if you have not done so already. Lenders may become overwhelmed with new requests and only have time to work with clients who are ready to go.
- You took out a new mortgage after January 1, 2020: A bird in the hand is worth two in the bush. Keep your information and documents handy and sit tight. Keep an eye on the market—if you see an opportunity to refinance and lock in a lower rate, you might want to consider taking it.
- You bought a home or refinanced in 2019: Get your loan documentation in order to take advantage of a lower rate if they drop. The more prepared you are, the better chance you have to be first in line.
- You are currently in the loan application process and have a rate locked in: Consider yourself very fortunate to be locked into a rate. There should be zero change to the terms of your loan as you complete the process.
Refinancing your home could shave a significant amount off your monthly mortgage payment. However, make sure to assess current market trends in addition to your own long-term financial goals.
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