by: Martin Santiago, Broker-Associate
THE average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($510,400 or less) decreased to a survey low of 2.92% from 2.99%, with points falling to 0.35 from 0.37 (including the origination fee) for loans with a 20% down payment. While more than 4 million borrowers have already refinanced their home loans so far this year, over 19 million more could still save substantially on their monthly payments through a refinance.
The drop in mortgage rates reflects mixed signals from the economy. An autumn spike in coronavirus cases undermined hopeful signs that a COVID-19 vaccine soon will be available, and the economic recovery so far has been uneven and incomplete. Yet stocks rose to new records on Tuesday, November 24.
Mortgage rates remain at record lows and while that has fueled a refinance boom, it’s been driven mainly by higher income borrowers. With about 20 million borrowers eligible to refinance, lower- and middle-income borrowers are leaving money on the table by not taking advantage of low rates. On the homebuying side, demand continues to surge, and it has created a seller’s market where inventory is at a record low and home prices are rising, beginning to offset the benefits of the low rates.
Is now a good time to refinance? Generally speaking, yes. Mortgage rates have regularly hit record lows over the past few months. Though rates can rise and fall from one week to the next, they have been around 3 percent over time, with some surveys showing them in the 2s. If you’re a homeowner with good or excellent credit, it’s a good time to think about refinancing. Remember: The Federal Housing Finance Agency will institute a new refinancing fee of 0.5 percent on all loans worth $125,000 or more. That fee goes into effect Dec. 1, but many mortgage lenders are already pricing the fee into their loan offers.
When should you refinance? There are lots of reasons to refinance, but two major drivers are changing the rate or term of your mortgage to save money, or a cash-out refinance to fund other projects.
A rate change typically means you’re securing a lower interest rate than what you’re paying on your existing mortgage. A term change means you’re changing the period of time it takes to pay off the loan. Sometimes you can change both the rate and term when you refinance. Securing a lower interest rate means you’ll have lower monthly payments and pay less interest over the remaining life of your loan. Changing the length of time you’ll take to pay off your mortgage can save you money in a few ways: if you lengthen the term, you’ll have lower monthly payments. If you shorten the term, your monthly payments may go up, but you’ll pay less interest over the life of the loan. With mortgage rates at historic lows, you may be able to shorten the length of your loan and still keep your monthly payments the same — or even make them lower.
With a cash-out refinance, you borrow against the equity you’ve built in your home. It will make your mortgage bigger, but it can be a cost-effective way to finance big projects (think home renovations or repairs) because mortgage rates are much lower than rates on personal loans and credit cards.
How to refinance? The most important step to find a competitive refinance offer is to shop around. Just like with securing a purchase mortgage, you want to make sure you’re getting the best offer. That means you can go to your current lender to see what they’re willing to do for you, but you should also be open to finding a new institution. Compare all the terms that various lenders are offering you, and see what makes the most sense in your own situation. Sometimes, for example, you may trade a slightly higher interest rate for other conveniences a particular lender may be able to offer you.
* * *
Martin Santiago is a broker associate at Compass Beverly Hills, a full service residential brokerage firm. The information presented in this article is for general information only and is not, nor intended to be a formal legal advice nor the formation of a broker-client relationship. Call or email Martin at (213)788-8300 & email@example.com.