Is it time for you to refinance your mortgage?
Worries over coronavirus also destroyed markets and driven investors rushing to the shelter of U.S. government debt. On Friday, for the first time, the yield on the 10-year Treasury Note dropped below 0.7%. Earlier this week, the Federal Reserve reduced its target rate to between 1% and 1.25%.
Mortgage prices are expected to plummet along with these yields. According to Freddie Mac, the 30-year fixed-rate mortgage paid 3.29 percent during the week of March 5, and the 15-year fixed-rate mortgage fell to 2.79 percent. “With the treasury rate increase right now, they ‘re likely to get bigger,” said Mike Fratantoni, Chief Economist at the Mortgage Bankers Association. “I think the low mortgage rate is going to be around for a while.”
If the yield on the 10-year treasury falls much more, mortgage rates may slip higher, much if they do not necessarily lock in with the government benchmark.
“It is opening up a whole new field of refinancing for mortgage investors,” said Guy Cecala, publisher of Inside Mortgage Finance, a market consulting company. “It’s a matter of time when it comes to how quickly lenders lower their rates to represent a 10-year [U.S.]. Treasury note], and it’s just a matter of how quickly they want to get to that amount. Still, at the very least, we’re talking about mortgage rates at 3.25% if not below 3% in the next few weeks, if anything remains the same— which it will be a once-in-a-lifetime refinancing chance.
If it makes sense to refinance a mortgage is now down to a variety of personal considerations. For example, it depends on the expense of a refi, how long you expect to stay in your house, how much you intend to invest, what you think your home is worth, and your opinion of the world economy.
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“Yields have fallen very dramatically, and the explanation for this is that there are worries about a significant recession in the global economy, primarily due to coronavirus,” said Kathy Jones, senior vice president and chief fixed-income strategist at the Schwab Center for Financial Analysis.
For those considering the refi right now, first look at the difference, or spread, between the current rate and the market rate. Then look at the costs, as refinancing means paying high closing costs— including title insurance and valuation— which can often amount to a few thousand dollars.
If the potential savings from a lower-rate mortgage do not make up for those costs, it may not make sense to refinance just yet. “The old rule of thumb used to be two years,” said Mr. Cecala. “If you can pay it back within two years and expect to be in the house for five years, then why not?
WHEN IT IS WORTH REFINANCING
- A homebuyer is putting 20 percent down on a home worth $266,300, the median home price in January.
- No plans to move forward soon.
- According to LendingTree, pay a 4 percent rate, resulting in a monthly payment of $1,017.09, excluding taxes, fees, and insurance.
- A 3.25% drop would reduce the payment from $1,017.09 to $927.16. The homeowner would save about $90 a month, with exclusions.
- Considering a refinancing expense of $2,000, this borrower will need to stay at home for a little longer than two years to make the income.
The prices have declined earlier, but anyone waiting for refinancing might theoretically see even better ones. As the coronavirus begins to grow and its implications are felt across the globe, Mr. Cecala said the mortgage industry could see much more change.
Lauri Droster, RBC Wealth Management Division Director in Madison, Wis., advises considering refinancing where there is a gap of one-half a percentage point or one percentage point.
Ms. Droster said that it’s easier for people to consider future benefits when they make it personal. Calculate how refinancing will impact monthly mortgage payments rather than merely looking at the percentage differential and looking at it in a hypothetical manner.
“When they see that in actual dollars, they will draw the comparison,” she added. “That’s when they can actually know what it entails because they can know that in dollars and say, ‘I’m paying $1,500 a month for my mortgage right now, and 1 percent lower is down to $1,200 a month.'”
WHEN IT ISN’T WORTH REFINANCING
- Home builder is putting 20 percent down on a house costing $266,300, with a 4 percent discount on a $213,040 fixed-rate loan.
- Plans to go forward in the coming two years.
- Fall to 3.65 percent of the average saves $42 a month, including exclusions.
- With a refinancing rate of $2,000, they will need to commit closer to four years to make refinancing worth the expense.
However, for those with flexible interest rates, Mr. Cecala advises that homeowners monitor how much their payment is adjusted. Most of them do so once every six to twelve months, in which case some homeowners may like to refinance the ARM at a fixed cost, he said, in order to lock it up at low prices.
“If you’re thinking ‘I’m hoping to be in this home for the next five years, because I don’t want to care about what’s going on with interest rates,’ that’s pretty much no-brainer,” he stated.
However, those with high loan-to – value levels will not be able to refinance, considering the fact that they may wish to do so. But Sam Khater, Chief Economist at Freddie Mac, said that, with home prices increasing gradually over the last decade, this is a unusual phenomenon.
Dan Egan, Director of Behavioral Finance at Betterment, is himself considering refinancing his home. The change makes sense to him because he and his wife have already agreed to shorten their loan term from a 30-year mortgage to a 15-year mortgage. Their net mortgage expenses could be higher as a result, but they would have charged cheaper interest rates for a shorter period of time. His tax condition will not improve as “the statutory deduction is high enough.”
“My rate was 4 percent and it was a 30-year mortgage that I’m six years old, so I’m looking now, especially with the current stock market softening. If the rates get a little lower, I might be looking at a new mortgage rate of 3.5 percent, “he said. “The difference between 4 percent and 3.5 percent may be small, unless you look at interest payments over a number of years. So for me, that change would mean saving around $500 a month, which is significant.
With mortgage rates falling and interest refinancing growing, Mr. Cecala said that math “gets easier.”
“The more you can adjust your interest rate, the more palatable it is to pick up the closing costs,” he said. “If you save $800 a month, you don’t mind spending $8,000 on closing costs because you’ll make it back in a year.”
