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

Mortgage Refinancing: How the Market Downturn Has Provided an Interesting Opportunity
Cathy C. Miller, MBA, CFP®, CRPS®, CDFA™
August 11, 2020

As of July 30, the national average rate for a 30-year mortgage has fallen to 2.99%, with an average of 0.8 points paid, while 15-year fixed rates have fallen even further with an average of 2.51% and .7 points paid, according to data from Freddie Mac.1 Mortgage rates have plunged to the lowest levels in decades, and continue to remain near historic lows, driving purchase demand over 20 percent above a year ago. Real estate is one of the bright spots in the economy, with strong demand and modest slowdown in home prices heading into the late summer. Home sales should remain strong the next few months into the fall.

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.

Recently, yields on the 10-year Treasury note have declined dramatically, falling to historic lows of 5.35% as of 7/31. 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.

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 weighty decision.

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 of dollars 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.2 This is because the cost of refinancing can reach a few thousand dollars once you factor in fees for appraisals, title searches, etc.

There are other factors to consider in addition to how much you might be lowering your interest rate. For example, if you don’t plan on remaining in your home long term, you may not have enough time for the savings on interest expense to offset your closing costs.  Calculating your break-even point is an important exercise if this isn’t your “forever home.” Your AFA advisor or your mortgage broker can help you with this.

Also, if you are well into the term of your mortgage, you should carefully think through the term of refinance you are considering.  For some homeowners, refinancing from a 30-year mortgage to a 15-year mortgage can be even more powerful. The 15-year rate is lower still than a current 30-year rate, and you may be able to shorten the maturity of your loan and still keep your payment at or below your current payment.

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.

In short, there are many factors to consider, such as how long you plan to remain in your home, whether to shorten the maturity of the loan and what closing costs are reasonable. For any of our clients with interest rates in the range of 3.5-3.75% or higher, we welcome the opportunity to help you decide if some form of refinancing is right for you or not.  Please reach out to your AFA team today for help with a customized recommendation.

 

  1. http://www.freddiemac.com/pmms/
  2. https://cdn.blackknightinc.com/wp-content/uploads/2020/02/BKI_MM_Jan2020_Report.pdf

 

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