BY JULIAN HEBRON
Mortgage rates have been dropping. Is it time for you to refinance your home?
From the time the Federal Reserve raised rates in December 2015 to mid-February 2016, mortgage rates dropped to their lowest level in three years. We examined why mortgage rates would drop after a Fed hike, and since the downward mortgage rate trend is continuing, here is a refinance reference guide.
2016 rate recap and outlook
Rates drop when economic uncertainty causes investors to sell riskier stocks and buy safer bonds. When bond prices rise on this buying, bond yields (or rates) drop.
This is what’s been happening in 2016 as non-U.S. economic weakness has caused global investors to buy the safety of U.S. Treasury and mortgage bonds.
In December 2015, 30-year fixed rates were about 4% on conforming loans, 4.125% on high-balance conforming loans, and 3.875% onjumbo loans. As bonds have rallied since then, rates on all these loan tiers are down as much as 0.5%, which translates into lower monthly payments as follows: $85 lower on a $300,000 mortgage, $170 lower on a $600,000 mortgage, and $253 lower on a $900,000 mortgage.
This savings alone is strong rationale for a refinance, and rates could drop even further in the next few months if non-U.S. weakness persists. But even in a downward rate trend, rates rise and fall along the way. (See When to lock your rate below for more on how to lock in the lows.)
Factors driving a 2016 refi boom
Refinances aren’t just about rates. They’re also about income, asset, and property eligibility.
During previous post-crisis rate dips, many refinances were derailed because people owed more than their homes were worth, their income was down or disrupted, and lender guidelines were abnormally tight.
Now the U.S. economy is more supportive of refinances, with stable or increasing home prices, low unemployment of 4.9 percent, income trending up, low inflation helped by a steep drop in oil prices, and lender guidelines more flexible now than any other post-crisis rate dip.
Reasons to refinance
The most obvious reason to refinance is for a lower rate and monthly payment, but there are a few other refinance objectives to consider:
- Shorten your loan payoff period. For example, you could go from a 30-year loan to a 15-year loan, which has lower rates and higher payments because you pay it off in half the time — but when rates dip, payments on 15-year loans become more feasible.
- Access cash. A “cash out” refinance allows you to access your home’s equity for other financial objectives, such as retirement investing or funding home improvements.
- Consolidate debt. If you qualify, you can roll non-housing debt like student loans, credit cards, and car loans into a home refinance. This helps improve your credit score, and also converts that non-tax-deductible debt into tax-deductible debt.
- Eliminate mortgage insurance or a second mortgage. If you bought your home with less than 20 percent down using mortgage insurance or a second mortgage, and your home’s value has increased to the point that you now have 20 percent equity, a refinance can eliminate mortgage insurance or a second mortgage.
Credit score impacts of rate shopping
Credit scoring models know people shop for mortgages, so more than one mortgage-related credit run won’t reduce your score if youfinish shopping within 14 days.
Choose a lender early
A rate quote is based on a refinance closing within a certain number of days — typically 30-60 days — and longer rate locks have higher rates. So choose the lender you want to work with early, and get them all of your required documentation so they can perform on the shortest (and therefore cheapest) possible rate lock timeline.
Even if you refinance with a lender you’ve worked with before, federal laws require them to update your employment, income, asset, and debt documentation for a new loan.
Your home must qualify
In addition to you qualifying for the loan, your home must qualify, too. An appraisal report must prove your home is worth enough to make the refinance work, and lenders can require certain repairs prior to loan closing — like water-related damage or safety issues such as loose railings.
If you’re a condo owner, the condo building will be subject to a list of requirements. Ask your lender to brief you on condo requirements in advance of locking your refinance.
Handling your second mortgage
If you have a second mortgage you intend to leave in place, the second mortgage holder must agree to the terms of the refinance before the refinance closes. This is required even if you have a Home Equity Line of Credit (HELOC) with a zero balance. This can add time to the process, and, again, longer rate locks have higher rates.
Cost or no-cost refinance?
Refinance viability is all about how it takes monthly savings from a refinance to repay refinance closing costs ($2,000 to $4,000, depending on your market). But if you paid to refinance, then rates dropped more, you’d risk losing money.
So when rates are declining, you can choose to do a no-cost refinance. The rate will be slightly higher on a no-cost refinance, but then you’re not wasting closing costs if you refinanced again soon after because rates dropped.
Your lender can help determine the best path based on your profile and rate market expectations.
Before locking a refinance, find a lender to pre-approve you using your full documentation and home value estimate so you can be sure you’re being locked on a program and timeline the lender can perform on. And if your refinance pre-approval is ready to go, it’s easier to lock rate lows on a moment’s notice as rates bounce up and down on each trading day.
What to do if rates drop after you’ve locked your rate
Rates change daily, and if rates drop after you commit to your rate lock, lenders have renegotiation policies that enable you to capture part of that drop.
For example, if rates dropped .25 percent after your rate lock commitment, typical lender renegotiation policies would allow you to drop your locked rate by .125 percent.