The coronavirus pandemic has disrupted life for virtually every American.
That includes homeowners—particularly owners who may have been considering a home sale before the COVID-19 crisis hit but who are now skittish about listing their properties in an uncertain real estate market.
But not all the news is negative. One stroke of good luck lately is that mortgage interest rates have fallen, prompting borrowers to refinance to reduce their monthly payments, shorten their term, or both.
Rates dropping has also motivated prospective sellers, who can benefit from lower rates, to stay put and reset their mortgages.
If you can decrease your interest rate by at least a half-point or more and can resist the urge to move for a minimum of three years (the time it will likely take to recoup your closing costs), a refinance is probably worth it. But it may not be as easy as picking up the phone or making a few mouse clicks and counting on a prompt response from a lender.
Truth is, many lenders have been swamped by a deluge of mortgage holders who all have the same idea. That means it may take longer than you expect to initiate, process, and close on a mortgage refi, the experts’ caution.
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Why Rates are so Enticing Lately
Glenn Brunker, mortgage executive for Ally Home in Charlotte, North Carolina, says several things have contributed to lower mortgage rates in recent weeks.
“Falling interest rates, driven down by rate cuts made by the Federal Reserve, are applying downward pressure on mortgage rates,” he notes.
Bruce Ailion, real estate attorney and Realtor for RE/MAX Town and Country in Alpharetta, Georgia, echoes those thoughts.
“There is fear in the economy that, even after the coronavirus, we will be in a deep recession. To avoid this, the Fed has reduced the federal funds rate to effectively zero,” says Ailion. “Plus, fewer homes on the market result in lower demand for money, which can affect rates.”
There’s another catalyst at work here, too, per Rick Sharga, president/CEO of Trabuco Canyon, California-headquartered CJ Patrick Company.
“Rates on 30-year mortgages move in tandem with the yields on US Treasuries, which are now at nearly historically low levels,” says Sharga.
Interestingly, rates have seesawed a bit in recent weeks, ticking up at times that seem counterintuitive.
“What has happened is that the surge in refinancing demand in March actually buoyed loan prices, as lenders received more applications than they could handle—resulting in longer cycle times and some upward pressure on pricing,” explains Brunker. “Now that we seem to have passed this initial surge, we’re starting to see lenders lower rates accordingly.”
That’s good news if you plan to refinance relatively soon.
Why It Can Pay to Refinance Now
Consider that a half-point reduction in mortgage interest rates can yield big savings. Say, for example, you currently have a 4.0% interest rate on your mortgage. If you refi to a 3.5% rate 30-year mortgage, with $200,000 borrowed, it can lower your monthly payments by $28 for every $100,000 financed. That equates to $672 in annual savings and $20,106 in savings over the life of your loan.
“A lower rate also provides a much lower cost alternative for homeowners who prefer to renovate their homes rather than move,” Sharga adds. “A cash-out refinance, or a home equity line of credit for a well-qualified borrower usually has an interest rate far lower than a credit card, personal loan, or financing available through a home improvement business.”
The point at which it’s worthwhile to refi will depend on your current rate, outstanding balance, loan term, and length of time you plan to stay put, of course.
“Consequently, it’s important to work with an experienced mortgage professional who can help you understand all your choices and aid you in selecting the best option that fits your financial goals,” Brunker says.
What to expect if you pull the trigger
Convinced you can benefit from a refi? Want to act now before rates creep up again? Prepare to temper your enthusiasm with a dash of reality, because things may not happen as quickly as you’d like.
“Many lenders have been overwhelmed with the number of refinancing requests they’ve received recently. In extreme cases, some have even stopped taking new applications,” cautions Sharga. “The industry didn’t anticipate that rates would fall as far as they did or as quickly, and they simply didn’t have the systems and staff in place to accommodate the massive increase in loan volumes.”
However, Brunker says matters have been improving.
“For now, it looks like we’re past the peak volume. You can likely expect rate lock periods and application processing times to slowly start trending down,” says Brunker. “But uncertainty around COVID-19 might keep these times elevated for a little longer.”
Be forewarned that many lenders are tightening their borrowing rules, requiring, for instance, a slightly higher credit score and more documentation to qualify for a loan. That could mean you have to shop around longer for an approving lender and/or experience longer wait times for approval.
Contributing to the delays and backlog are social distancing rules in place and the fact that some mortgage industry workers have missed work due to contracting or recovering from COVID-19.
“Many loan officers, underwriters, and loan processors are forced to work from home, without normal access to loan operating systems. Also, loans that require home inspections or internal appraisals have slowed to a crawl, since on-site visits are virtually impossible with pandemic restrictions,” Sharga.
Rajeh Saadeh, a real estate attorney in Somerville, New Jersey, says borrowers “should expect that lenders and closing companies will take precautions to ensure everyone’s health and safety. This may require borrowers, for example, to sign loan documents electronically and participate in a drive-by-closing, in which you sign closing papers from the safety of your car, appropriately witnessed by a notary.”
The bottom line?
You can anticipate the entire refi process taking longer than normal. Tack on an extra week or two to the typical timetable just to be safe, the pros agree.