Mortgage refinancing has become more attractive, thanks to the combination of a fall in mortgage rates in recent weeks and the end of a much maligned federal tax on refis. The average 30-year refinance rate fell to 3.03% this week from 3.11% last week, according to Bankrate’s national survey of lenders.
Many in the mortgage industry expected the refinancing boom to fade as the economy recovers from the coronavirus recession. Instead, the spread of the Delta variant of COVID-19 has shaken financial markets.
For homeowners, there is a new opportunity to take advantage of low refi rates. “A lot of people who thought they missed the boat the first time around might be interested now,” says Sebastian Hart, senior director of capital markets at mortgage lender Better.com.
Mortgage refinancing rates are moving in favor of borrowers for several reasons. In a pilot, mortgage regulators said last week they were ending a widely criticized surtax on refinancing. This announcement from the Federal Housing Finance Agency came on Friday morning and Friday afternoon as lenders were lowering refi rates.
“As soon as this announcement was made by the FHFA, the lenders were hot,” says Robert Humann of Credible.com.
Homeowners have reacted, too, by taking advantage of the drop in rates. “Our pipeline jumped 20% in one week,” says Gordon Miller, owner of Miller Lending Group in Cary, North Carolina.
Mortgage rates are falling everywhere
The federal fees of 0.5 percent of the amount of a refinance were paid by lenders rather than borrowers. In response, lenders last year hiked refi rates by about 12.5 basis points, or 0.125 percentage points.
Some lenders have cut the rates on 15-year fixed-rate loans to less than 2%, and they dangled deals on 30-year refinances well below 3%. These measures could rekindle a refinancing boom that was in full swing earlier this year.
The other factor driving mortgage rates down is the resurgence of the coronavirus, which raises new questions about the future of the economic recovery. Reflecting these concerns, the yield on 10-year Treasury bonds fell to 1.28% on Wednesday. The 10-year Treasury – a key benchmark for 30-year mortgage rates – stood at 1.5% a month ago.
How to refinance your mortgage
Step 1: set a clear goal
Have a compelling reason to refinance. This could be lowering your monthly payments, shortening the term of your loan, or withdrawing equity for home repairs or to pay off higher interest rate debt. You may also want to roll your HELOC into a refi.
What to consider: If you lower your interest rate but reset the clock on a 30-year mortgage, you could be paying less each month, but more over the life of your loan. This is because the amortization charges up front interest charges during the first few years of a mortgage.
Step 2: Check Your Credit Score
You will need to qualify for refinancing just like you would need to get approved for your original home loan. The higher your credit score, the better the refinancing rates lenders will offer you, and the better your chances of underwriters to approve your loan.
What to consider: Lenders have become more stringent on granting credit during the pandemic, so the typical mortgage borrower’s credit rating is higher than ever. While there are ways to refinance your mortgage with bad credit, it may be a good idea to spend a few months raising your credit score before you begin the process.
Step 3: determine the equity in your home
The equity in your home is the value of your home that is more than what you owe your mortgage lender. To find this number, check your mortgage statement to see your current balance. Then check out online home search sites or have a real estate agent perform a scan to find your home’s current estimated value. The equity in your home is the difference between the two. For example, if you still owe $ 250,000 on your home and it is worth $ 325,000, your home equity is $ 75,000.
What to consider: You may be able to refinance a conventional loan with as little as 5% equity, but you’ll get better rates and lower fees (and you won’t have to pay private mortgage insurance, or PMI) if you have more than 20% equity. The more equity you have in your home, the less risky the loan is for the lender.
Step 4: Shop around for multiple mortgage lenders
Getting quotes from multiple mortgage lenders can save you thousands of dollars. Once you’ve chosen a lender, discuss the best time to lock in your rate so you don’t have to worry about the rate going up before your loan closes.
What to consider: In addition to comparing interest rates, pay attention to the cost of fees and whether they will be owed upfront or built into your new mortgage. Lenders sometimes offer refinances with no closing costs, but charge a higher interest rate or add to the loan balance to compensate.
Step 5: Put your papers in order
Gather recent pay stubs, federal income tax returns, bank statements, and whatever else your mortgage lender asks for. Your lender will also look at your credit and equity, so disclose your assets and liabilities up front.
What to consider: Having your documentation ready before you start the refinance process can make it smoother.
Step 6: Prepare for the assessment
Mortgage lenders generally require a mortgage refinance appraisal to determine the current market value of your home.
What to consider: You will pay a few hundred dollars for the evaluation. Notifying the lender of any improvements or repairs you have made since purchasing your home could result in a higher valuation.