The Wall Street Journal - March 12, 2021
Mortgage rates are on the rise after nearly a year of record lows, providing a nudge to homeowners who want to refinance but didn’t get around to it yet.
Does it still make sense to call up your lender and file an application? There is time to figure it out. Here are some questions to consider:
What rate makes sense for me?
First find the difference between your current mortgage rate and the potential savings of a refinance offer. The rate for a refi will vary based on the particular homeowner. Lenders consider credit history, income and home equity when evaluating applications.
The average rate on a 30-year mortgage rose to 3.05% for the week of March 11, according to Freddie Mac. While that is higher than historic lows reached last summer, homeowners with rates above 4% could still benefit from refinancing.
Consider how many months it would take for you to recoup the costs of closing on a refi, along with how long you’ll be staying at this home. If you can recoup closing costs within two years and plan to stay in your house for longer, the savings on interest means the math will likely work out in your favor.
What if closing costs are too high?
If the potential savings from a new mortgage won’t recoup the closing costs—like title insurance, state taxes, appraisal fees and more—it may not make sense to refinance just yet. The national average for associated refinancing fees is nearly $3,400 with taxes, according to ClosingCorp, a firm providing residential real-estate data. This number hasn’t significantly changed as a result of the pandemic, said Bob Jennings, chief executive officer of ClosingCorp.
In some cases lenders are waiving appraisals—and the associated costs—due to concerns about social distancing. Ask your lender about the research process to ensure this doesn’t lead to an underestimate of the home’s true value.
I have an adjustable-rate mortgage. Is this the time to switch to a fixed rate?
Those with adjustable-rate mortgages might be looking to refinance to a fixed-rate mortgage so they can lock in these ultralow rates.
As you consider moving from an ARM to a FRM, first check where the loan is in terms of its adjustment cycle, and consider how often your rate adjusts. Most only do so every six or 12 months, which gives some homeowners more flexibility when it comes to exploring refinancing and saving up for the potential closing costs.
“A lot of borrowers don’t want the uncertainty,” said Malcom Hollensteiner, head of mortgage production at Sandy Spring Bank in Olney, Md.
Because rates have stayed so low and aren’t expected to skyrocket overnight, some homeowners might decide to forgo the associated costs of refinancing.
I have a 30-year fixed-rate mortgage. Should I shorten that to 15 years?
Many homeowners are considering changing the term of their loan from a 30-year fixed rate mortgage to a 15-year loan, according to Mr. Hollensteiner at Sandy Spring Bank.
That won’t reduce your monthly payment but doing it now may mean “that payment isn’t going to be much higher than what they’re paying today,” he said. “So if they can save 12 years off the loan, it’s a huge interest savings over time.”
How will the equity in my house affect the situation?
The difference between the value of your home and the remaining mortgage balance is the equity you have in the home—and a key number to have in mind as you pursue refinancing. Those who may want to refinance to eliminate private mortgage insurance must have home equity worth 20% the value of the home.
Mr. Hollensteiner said some homeowners could benefit from a reappraisal that shows how the booming housing market increased home values. Some homeowners might find they have more equity to draw from than they previously thought.
Should I consider a cash-out refi?
Cash-out refis let borrowers essentially swap their current mortgage with a fresh one that has a higher balance and, potentially, a lower interest rate. That allows a homeowner to pay off the old mortgage and still have cash left over.
The difference between your mortgage balance and your home value then goes to your bank account, which some homeowners use for home improvements (increasingly popular as many are spending more time at home), debt obligations or other financial goals and responsibilities. Cash-out refis have now hit their highest levels since the 2008-09 financial crisis.
Ask yourself what you would do with the money. It might make sense if you finish home improvements that increase the resale value of your house. Or, if you pay down debt and boost your credit score. But if the extra money won’t go to good use, consider a refinancing option that lowers your payments and shortens the life of the loan.
How do mortgage points affect a refi?
When lenders talk about mortgage points, think of them as “prepaid interest,” said Shant Banosian, loan officer at mortgage lender Guaranteed Rate. They are extra costs tacked onto the front of the loan to lock in a lower rate. This increases the closing costs, but could be worth it if your No. 1 goal is to secure a lower rate and save on overall interest. “If someone is going to be in their house for 30 years and it takes two years to recoup these costs, why wouldn’t you want to save money for 28 years?” he said.
How quickly do I need to act?
Some three million homeowners are expected to refinance their mortgages this month, according to forecast data from Black Knight Inc., a mortgage technology and data provider. But make sure a refi decision is right for you. Remember—rates could always drop again in the future.
“I don’t want people to rush, and I don’t want them to chase a bottom or chase a rate,” said Gordon Miller, president of Miller Lending Group. “Do the math. If I had a nickel for every time someone said, ‘We’ll never see rates this low again,’ I would’ve retired after three years.”
By Julia Carpenter
Write to Julia Carpenter at Julia.Carpenter@wsj.com
Dow Jones & Company, Inc.
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