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If you’ve got a mortgage, it’s almost definitely one of your biggest financial burdens. And with mortgage interest rates near historic lows right now, this could be an ideal time for you to seize the opportunity to refinance and save.
The low rates we’re currently seeing are a small silver lining of the COVID-19 economy. In an effort to shore up the market and encourage home buying, the Federal Reserve slashed interest rates, and mortgage rates followed suit.
At the end of April, they sat at an all-time low. Right now, the average interest rate for a 30-year fixed-rate mortgage is 3.23%, while a 15-year fixed-rate mortgage comes with an average interest rate of 2.77%. People are paying attention, too: Over a single-week span in March, mortgage applications increased by 55.4% compared to the week prior.
Clearly, those rates don’t exist in a vacuum, though, and refinancing only makes sense if it fits in context with your overall financial picture.
And while personal finance experts say that a refinance could save thousands of dollars over the long-term for the right people, they’re also raising a big red flag. In order to secure a refinance that’s worth your while, you need to measure up to newly strict lending requirements.
That means you’ll need to be able to prove a steady income, a challenge many will face with the economic uncertainty COVID-19 continues to create.
Why It Makes Sense to Refinance Now
Because rates are at a historic low, many homeowners could lower their rates and save thousands by refinancing.
And many are taking advantage of the opportunity. While the mortgage industry usually handles a volume of somewhere between $1.5 and 3 trillion in a given year, experts are projecting that figure will hit $6 trillion this year, says Michael Chabot, SVP of residential lending at Draper & Kramer Mortgage Corp.
Scoring a lower rate, which tends to reduce your monthly payments, isn’t the only benefit. Other perks include:
- Moving from an adjustable rate to a fixed rate
- Eliminating PMI, or private mortgage insurance
- Shortening the term of your mortgage so you can pay it off sooner
For more on refinancing and how it works, check out our full guide here.
Why You Shouldn’t Refinance Now
It’s an exciting time to explore the possibility of refinancing your mortgage. But a refi isn’t right for everyone. Here are a few factors that could make it a better idea to stick with the mortgage you have.
One big caveat
When we polled experts and scoured the news, we found one glaring reason not to refinance: the job market’s uncertainty. While refinancing can help you lower your home loan’s total cost across its lifespan, there is a key timeliness component to consider. Since a refinance is essentially getting a new mortgage to replace your current one, with a whole new set of closing and other loan origination costs, it usually takes at least a few years to recoup the costs and start seeing benefits from refinancing. If you lose your source of income, you could be forced to sell your home or, worse yet, foreclose. Doing so in the next couple of years will almost definitely prevent you from realizing any benefits from refinancing.
If you’re concerned about your job stability, Chabot advises waiting to refinance. The refi process can take several months to complete, and that effort will be wasted if you don’t have a stable source of income when you’re ready to sign the papers. “If you know you’re going to be laid off, I’d tell you not to do it,” he says. That’s because collecting unemployment essentially disqualifies you from refinancing.
Dominic Turano, a senior vice president and loan officer for Atlantic Coast Mortgage, echoes the sentiment. “Lenders are required to warrant that you’ll be able to make the payment on the new loan, and unemployment income isn’t considered stable, recurring income,” he says.
If you don’t feel like you have a sturdy foundation under you at your job, you should probably not initiate the monthslong process of refinancing, which can include extensive rate shopping, a home appraisal, and gathering reams of paperwork and documentation.
Worsening credit score
If your credit score has gone down since you originally secured your financing for your home, you may not be able to capitalize on the full benefit of low interest rates. That said, if your score has only decreased slightly, we still recommend checking on the rates you’d be able to secure based on your current credit score. Because rates are so low right now, you may be able to get a lower rate even with a slightly worse credit score. Run the numbers to see if there’s any benefit for you.
If your score has dropped drastically, though, skip it. The hard inquiry required during the refinance process will only hurt your credit score more.
Also, don’t forget you can take strides to improve your credit score. There are very few quick fixes for bad credit, but making changes now helps you boost your score over time so you can be ready the next time a financial opportunity arises.
No surprise here: Mortgage lenders aren’t feeling particularly comfortable in the current economic environment. To protect themselves, they’re tightening lending requirements from minimum credit scores to more stringent employment verification processes. Even if you were able to secure a refinance at the beginning of this year, these stricter requirements might make it impossible for you to refi now.
Turano explains, “The coronavirus issue has created a ton of turmoil in the mortgage industry. While rates are low, loan guidelines are changing regularly, and the rules typically governing mortgage-backed securities have also changed.” He adds, “These changes have generally created a more restrictive lending environment.”
History of late payments
Each time you miss a payment, your credit score takes a dip. And in light of the tightening requirements, our mortgage experts say they see across the industry, and chronic late payments aren’t going to do you any favors during the refi process.
Your mortgage payment is not the only bill to stay diligent about, either. Make sure you stay on top of your car payments, student loans, credit card payments, and any other dues. Set calendar reminders or set up automatic payment to give yourself some protection against forgetfulness. It will take time for your credit score to recover, but starting to stay on top of your payments now puts you on the path to success.
Before you jump on the refinance bandwagon, take a close look at your income stability. If you’re not entirely secure, think twice before embarking on a refinance loan journey.
Inconsistent job history
“Job stability is a prerequisite to refinance,” says Karen Chiu, a business development manager at the lender New American Funding.
“For individuals with no documentation or alternate documentation for stated income, this is not a good time to refinance,” Chiu says. As lenders tighten requirements around refinancing, she says she expects fewer programs to be available allowing for flexibility in the individual’s income stream.
But if you were furloughed during the pandemic and eventually get back to work, you’re probably going to be in luck. Lenders just want to see proof of income. “As long as you have one pay stub and can prove you’re back to work, you can refinance,” Chabot says.
A longer wait
Chabot points out another potential hurdle to refinancing right now, especially for impatient homeowners. In regards to the increased volume the mortgage industry is seeing right now, he says, “The industry just isn’t set up to handle that.” He adds, “The biggest challenge has just been getting loans in, getting them processed and underwritten. Some banks are saying six months to close loans because they just don’t have the resources.”
Is Refinancing Right For Me?
Ultimately, to determine if you should refinance, crunch the numbers yourself. “Here’s what I tell everybody,” Chabot says. “I think it’s a good time to refinance if it’s right for your financial situation.” Look for savings of at least a half percent, and make sure you feel extremely confident you’ll be able to cover your new monthly payment for the life of the loan.
Also, don’t feel rushed. Several experts agreed that low mortgage rates will not be going away any time soon.
If you’re not feeling certain about your employment in the coming months, it could make sense to wait until later in the year to explore a refi.