The coronavirus has hit financial markets hard worldwide, with many investors fleeing the market to save themselves from further losses. However, the coronavirus could prove to be a blessing in disguise for those looking to refinance their mortgage or buy a home.
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Mortgage rates already low
Mortgage rates have already been hovering near record lows. The rate for a 30-year fixed-rate mortgage dropped to an average of 3.45% last week, while the rate for a 15-year fixed rate mortgage fell to 2.95%, according to data from Freddie Mac.
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Due to the dropping rate, mortgage refinance applications increased 26% last week compared to a week earlier. Compared to the same period last year, the number of applications jumped 224%, according to data from the Mortgage Bankers Association.
This mini boom in mortgage refinance follows turbulence in Wall Street due to the coronavirus. As a result, many investors put their money in less risky bonds, leading to a fall in the 10-year Treasury yield. The 10-year-Treasury yield dropped further this week. On Tuesday, it dropped below 1% for the first time ever.
Even though mortgage rates don’t move directly with the Fed's benchmark rate, monetary policy does affect them as lenders price loans based on 10-year Treasury yields. Historically, a correlation has been seen in declines of yields and mortgage rates.
Mortgage rates to drop further
Now with the latest Fed rate cut, mortgage rates are expected to drop even further. In other words, if you have been waiting to buy a home or refinance your mortgage, now is the right time. On Tuesday, the Federal Reserve slashed the federal funds target rate by a half-percent.
“Given the further drop in Treasury rates this week, we expect refinance activity will increase even more until fears subside and rates stabilize,” the Mortgage Bankers Association (MBA) said in a press release.
This rate directly affects short-term consumer and business loans and will benefit those with adjustable-rate mortgages, or ARMs. Although the rate cut won’t immediately and directly impact fixed-rate mortgages, it will contribute to creating a lower interest rate environment.
A point to note is that the rate cut alone won’t be enough to attract new home buyers. Rather, it will encourage those who were considering buying a home to act more quickly. Moreover, this rate cut won’t just benefit individuals, but rather, the whole real estate sector.
Should you refinance your mortgage or not?
The coronavirus may contribute to reduced monthly payments for those looking to refinance a mortgage or buy a home, but whether or not you should refinance depends not just on rates. Rather, you must consider your situation and a few other factors.
For instance, experts recommend that those planning to move in the next couple of years should not opt to refinance. Another thing you need to consider is if you could bear the closing costs related to refinancing. On average, these costs range from 3% to 6% of the mortgage’s value.
Thus, you need to evaluate if the current rates are low enough to reduce your overall cost of refinancing. You can get help from various online refinancing calculators or get in touch with an expert.
You also need to take into account the immediate impact the refinancing will have on your finances. You should only opt to refinance if you feel it would result in meaningful savings. To arrive at a conclusion, you need to compare the numbers offered to you with the terms you currently have.
Opting for mortgage refinance: consider these factors
If you have decided to buy a new home or refinance your mortgage, one question you may come across is whether to make a move now or wait for the interest rate to drop further. Nothing is sure, given the uncertainty around the coronavirus. Overall, there are expectations of a V-shaped recovery. However, if the outbreak lasts longer, economic activity may drop further.
There is another important point to keep in mind, especially if you have been paying on your mortgage for five to 10 years. Suppose if you take a new 30-year loan, you will go back to year one on your payments. This may not appear relevant to you, but it matters a lot because now much more of your monthly payment will be directed toward interest rather than the principal.
Thus, if you can afford a shorter term, then it is always better to opt for one or refinance your mortgage into a 15-year loan. If you can’t afford a 15-year loan, then try to lock in a 20-year mortgage.
Moreover, if you have decided to refinance, you should also inquire about rates from different banks and not just depend on one bank.