Mortgage giant Fannie Mae says rates could drop below 3% by early 2021. The National Association of Realtors is considering a similar scenario.
For owners who are considering refinance their mortgages, these predictions present a conundrum: Should you pull the trigger now? Or should you wait until later in the year, hoping that rates will drop below the current 3.5% range and lenders will clear a backlog of applications, while taking the risk that rates will go up?
In the past, when mortgage rates went down, the answer was always clear: if you can save some change on monthly payments, refinance now. Don’t roll the dice on the direction of interest rates. But the combination of the coronavirus and a flood of refinancing requests has changed the rules.
“These times are unusual in many ways, one of which is that the urgency of jumping on a refinancing opportunity right away before it disappears is not necessarily the case right now,” says Greg McBride , CFA, Chief Financial Analyst of Bankrate. “Under normal circumstances, when rates fall and the door to refinancing opens, the onus is on borrowers to act quickly, as any rate reversal could close the door to refinancing.”
With unemployment in the United States near record highs and the country still partially closed, these are anything but normal. The economic recovery could drag on and hardly anyone expects mortgage rates to spike in the near future. There’s also this wild card: Lenders have been inundated so much with refinancing requests that they’ve kept rates higher than they normally would to stifle demand.
“The indications are that rates will stay low for the foreseeable future – or maybe they will go down – and that lenders will be able to serve more borrowers faster over time,” McBride said. “If you can refinance now, great. If it’s something you want to put on your to-do list for once life calms down a bit, it probably works, too.
Some say you should lock in a refinance rate now
McBride admits that waiting is not his typical advice. Normally, rates rebound and waiting borrowers lose out. This has already happened to some this spring, when mortgage rates have thrown borrowers in the wrong direction.
“My advice to clients is not to drag your feet,” says Ed Conarchy, mortgage consultant with Cherry Creek Mortgage Co. in Gurnee, Illinois. “If it makes sense to refi, bring in your documents, sign your forms and do everything on your side not to lose this opportunity. I have several clients who have dragged their feet and now regret it because the rates are at their lowest and they missed out on bigger savings opportunities.
Michael Fratantoni, chief economist at the Mortgage Bankers Association (MBA), also advises against trying to time rates. “Mortgage rates are really hard to predict,” says Fratantoni.
In other words, even the best economist in an industrial organization doesn’t know which way they’re going. In fact, mortgage experts interviewed each week by Bankrate are rarely unanimous in their forecasts on the future development of rates.
The MBA, for its part, anticipates only a small rate cut later this year. As Fannie Mae and the National Association of Realtors see 30-year fixed mortgage rates flirt with 3%, MBA says rates for the year will average 3.4% and rise to 3.5% year-on-year. next.
How to decide if you should refinance
Rather than betting on the direction of rates, Fratantoni says, you should refinance if that makes sense to you. In other words, if you plan to stay in your home for more than a few years and the savings are enough to offset your closing costs during that time, then you should redo. Conarchy says it’s easy to get so caught up in the hype surrounding low rates that you’re wrong.
“I see so many people looking to refi because it’s in the news and friends and family are talking about it,” he says. “But what they will save versus what they will pay will take them many years to break even. Too long in many cases. The facts are that the average length of time a consumer holds a mortgage is only four to seven years. So if it takes you five years to break even on a refi, there’s a good chance you’re out of that mortgage at that point anyway.
Keep in mind that refinancing is not free. You will be paying around 2% of the loan amount in fees, so you need to save enough through lower monthly payments to make up for that upfront cost.
To use a simple example, suppose you have a loan of $ 200,000 with a term of 30 years and an interest rate of 5%, which equates to a monthly principal and interest payment of $ 1,074. Refinancing the same amount at a rate of 3.5% would result in a monthly payment of $ 898. Over two years, you’ll save $ 4,224, which should cover your closing costs. In this case, refinancing now makes sense if you own the home for at least two more years.
But what if you already have a low enough interest rate? Then the decision becomes more difficult. Suppose you took out the same mortgage of $ 200,000, but at 4%. In this case, your monthly payment is $ 955. Refinancing at 3.5% would make no sense – the $ 1,368 savings over two years would not cover the costs of appraisal, title insurance and lender fees. For this to be profitable, rates would have to drop to 3%. (Bankrate Mortgage Calculator can help you outsmart the scenarios.)
There is a general consensus that mortgage rates are on the verge of going down once lenders process their current pile of loan applications. For now, lenders have raised their rates simply because they have more business than they can handle, says Jim Campagna, founder of SnapFi, a mortgage lender in San Jose, Calif.: “They don’t. can’t handle the capacity, so they’ve increased their tariffs.
What you can do to ensure a smooth refinance
Whenever you decide to refinance, here are a few ways to make the refi process as smooth as possible:
- Put your papers in order. Don’t let something simple like a missing document delay your refinance. Collect PDF files of financial documents including pay stubs, bank statements, tax returns, and retirement accounts.
- Ask about lock rate. Normally, lenders extend the rate freeze from 30 to 60 days, which means you won’t have to pay more if rates go up before your loan closes. These are not normal times, however, and many refinances don’t close within 30 to 60 days, so make sure your lender is prepared to extend your rate freeze if your deal is delayed.
- Keep your credit score tight. Now is not the time to miss a payment, take on new debt, or do anything to lower your credit score. Lenders are particularly strict on the credit history of borrowers.