May 28th, 2020 10:48 AM by Jackie A. Graves, President
Mortgage giant Fannie Mae says rates could fall below 3 percent by the
start of 2021. The National Association of Realtors envisions a similar
For homeowners considering refinancing their mortgages, those forecasts
present a conundrum: Should you pull the trigger now? Or should you wait until
later in the year, hoping that rates will fall below today’s 3.5 percent range
and lenders will clear out a backlog of applications — while taking a risk that
rates will move higher?
In the past, as mortgage rates fell, the answer was always clear: If you
can save a chunk of 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 refinance applications has changed the rules.
“These times are unusual in so many ways, one of which is
that the urgency to jump on a refinancing opportunity right away before it
disappears isn’t necessarily the case right now,” says Greg McBride, CFA,
Bankrate chief financial analyst. “In normal times, when rates drop and the refinancing
door opens, it behooves borrowers to move quickly, as any reversal in rates
could slam the refinancing door shut.”
With U.S. unemployment near record levels and the country
still partly shut down, these are anything but normal times. The economic
recovery could drag on, and almost no one predicts a spike in mortgage rates in
the near future. There’s also this wild card: Lenders have been so inundated
with refinance applications that they’ve kept rates higher than would be the
case in normal times to quell demand.
“Indications are that rates will remain low for the
foreseeable future – or perhaps move lower – and lenders will be able to serve
more borrowers more quickly as time progresses,” McBride says. “If you can
refinance now, great. If it’s something you want to put on your to-do list for
once life settles down a bit, that probably works, too.”
Some say you should lock a refinance rate in now
McBride acknowledges that waiting is not his typical advice.
Normally, rates bounce around, and borrowers who wait lose out. That already
has happened to some this spring, as mortgage rates have thrown head fakes on
“My advice to clients is do not drag your feet,” says Ed
Conarchy, mortgage adviser at Cherry Creek Mortgage Co. in Gurnee, Illinois.
“If it makes sense to refi, get your documents in, sign your forms and do
everything on your end so you don’t lose this opportunity. I have several
clients that have dragged their feet and are regretting it now, since rates are
off their lows and they have missed bigger savings opportunities.”
Michael Fratantoni, chief economist at the Mortgage Bankers
Association (MBA), likewise advises against trying to time rates. “Mortgage
rates are really difficult to forecast,” Fratantoni says.
In other words, not even the top economist at an industry
organization knows which way they’re going. Indeed, the mortgage experts polled
weekly by Bankrate are seldom unanimous in their forecasts of the future path
The MBA, for its part, predicts only a small drop in rates
later this year. While Fannie Mae and the National Association of Realtors see
30-year fixed mortgage rates flirting with 3 percent, MBA says rates for the
year will average 3.4 percent and edge back up to 3.5 percent next year.
How to decide if you should refinance
Rather than betting on the direction of rates, Fratantoni
says, you should refinance if it makes sense for you. In other words, if you
plan to stay in your home for more than a couple of years, and the savings are
enough to offset your closing costs in that time, then you should refi.
Conarchy says it’s easy to get so caught up in the hype surrounding low rates
that you miscalculate.
“I see so many people looking to refi because it is in the
news and friends and family are talking about it,” he says. “But what they will
save versus what they will pay is taking them many years to just break even.
Too long in many cases. The facts are that the average time a consumer holds a
mortgage is just four to seven years. So if it takes you five years to break
even on a refi, odds are you will be out of that mortgage by that time anyway.”
Keep in mind that refinancing isn’t free. You’ll pay about 2
percent of the loan amount in fees, so you need to save enough through lower
monthly payments to offset that upfront cost.
To use a simple example, say you have a $200,000 loan with a
30-year term and an interest rate of 5 percent, equating to a monthly payment
for principal and interest of $1,074. Refinancing the same amount to a 3.5
percent rate would yield a monthly payment of $898. Over two years, you’d reap
a savings of $4,224, which should cover your closing costs. In that case,
refinancing now makes sense if you own the house at least two more years.
But what if you already have a fairly low interest rate?
Then the decision gets tougher. Say you took the same $200,000 mortgage but at
4 percent. In that case, your monthly payment is $955. Refinancing at 3.5
percent wouldn’t make sense — the $1,368 in savings over two years wouldn’t
cover the costs of the appraisal, the title insurance and the lender’s fee. For
that to pay off, you’d need rates to plummet to the 3 percent range.
(Bankrate’s mortgage calculator can help you game out the scenarios.)
There’s a general consensus that mortgage rates are poised
to fall once lenders work through their current pile of loan applications. For
now, lenders have bumped up rates simply because they have more business than
they can handle, says Jim Campagna, founder of SnapFi, a mortgage lender in San
Jose, California: “They can’t handle the capacity, so they’ve raised their
What you can do to secure a smooth refinance
Whenever you decide to refinance, here are a few ways you
can make the refi process as smooth as possible:
Get your paperwork in order. Don’t let something simple like
a missing document delay your refinance. Collect PDFs of financial documents —
including pay stubs, bank statements, tax returns and retirement accounts.
Ask about rate locks. In normal times, lenders extend rate
locks for 30 to 60 days, meaning you won’t have to pay more if rates go up
before your loan closes. These aren’t normal times, though, and many refinances
aren’t closing within 30 to 60 days, so make sure your lender is willing to
extend your rate lock if your deal is delayed.
Keep your credit score tight. Now isn’t the time to miss a
payment, take on new debt or otherwise do anything to lower your credit score.
Lenders are being especially strict about borrowers’ credit histories.
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