Why It Has Never Been a More Perfect Time to Refinance Your Mortgage
Borrowers in the United States are evolving, becoming more and more financially savvy over the years. They are seeking to leverage both current consumer and housing trends.
While big banks like JP Morgan Chase are cracking down on credit eligibility requirements, such as requiring a minimum 700 credit score and 20% down on new conventional purchase mortgages, borrowers take advantage of increasing nation credit score trends, coupled with the low rate environment.
Experian notes that “approximately 21% of Americans had a FICO score that fell in the ‘good’ credit score range in the second quarter of 2019, while approximately 58% had a FICO score of 703 or greater.”
In fact, while the rest of the U.S. economy has been thrown into chaos, borrower refinance activity shows no signs of slowing down, despite the volatility of financial markets.
Recent data from the Federal Reserve Bank of New York indicates mortgage balances in the United State have increased by roughly $156 billion.
This means homeowners are utilizing the equity in their home and borrowing more money through refinancing to complete home improvement projects and renovation, while also taking advantage of more lucrative repayment terms.
According to aggregator Freddie Mac, $400 billion inflation-adjusted dollars made up refinances after rate drops in March 20204. This indicates that refinance activity has doubled compared to the same period last year.
Furthermore, the average borrower who refinanced lowered their rate by 0.75% and roughly 22% shortened their loan term.
Recently, the 30-year fixed rate hit its lowest level since 1971, hovering around 3.07% in early July. This is the sixth time the 30-year fixed rate has fallen to a new low in the past several months.
15-year fixed rates are also unprecedented low, cresting between 2.50 and 2.875%.
The Federal Reserve has also promised not to reduce its quantitative easing measure for the foreseeable future, dedicating itself to purchasing mortgage-backed securities and helping rates remain low through 2022.
Clearly, there is an argument to be made that there has never been a more perfect time to refinance. Let’s explore some reasons why you may want to consider refinancing your mortgage right now.
Reasons to Complete a Mortgage Refinance
Borrowers are flocking to refinance existing mortgage debt. As data suggests, many borrowers have been able to lower their interest rate.
But there are other benefits to refinancing other than just taking advantage of lower refinance mortgage rates.
Here are a few reasons why you should consider refinancing your mortgage sooner rather than later.
Switch From an Adjustable to a Fixed Rate
If you are finding it hard to manage the volatility occurring in many U.S. markets, refinancing may be able to provide you with some much-needed additional stability.
Borrowers currently in an adjustable-rate mortgage solution may find refinancing into a fixed-rate solution a more manageable solution.
Those who have an adjustable-rate can see swings in their monthly mortgage payment when interest rate adjustments occur. This can make budgeting a bit more difficult compared to a fixed-rate solution where the monthly payment amount never fluctuates.
Lower Your Monthly Payment
One of the biggest reasons why borrowers choose to refinance is to potentially lower their monthly payment.
Decreasing the interest rate and/or increasing the term of your mortgage while keeping your loan amount the same can lower the amount you pay each month.
Keep in mind, increasing the term means it will also take longer to pay off your mortgage (if you only make the minimum required payment).
However, borrowers having issues making mortgage payments amidst the COVID-19 pandemic may find the short-term relief to outweigh this long-term consequence.
Pay off Your Mortgage Faster
Borrowers not seeking to lower their monthly payment may opt to decrease their repayment term, thereby effectively paying off their loan faster.
Typically, mortgage loans with shorter repayment terms have more favorable interest rates. Borrowers that go with a shorter-term will also incur less interest expense, compared to that of a longer-term, over the life of the loan.
Another important note is that a shorter term typically means a larger monthly payment.
Access Available Equity
If you have been delaying major home renovations and improvements, refinancing now can not only lock you into a lower rate but it can also allow you to tap into available equity in your home to be used toward upgrades or improvements.
While some borrowers are concerned that contractors are delaying interior renovation projects, the National Association of the Remodeling Industry (NARI) mentions that contractors are more likely to take on outside projects.
Need to install a new roof or looking to replace the flatwork in your driveway? Now might be the perfect opportunity.
You want your home to be in tip-top shape, especially if your plans to move have been delayed for the foreseeable future as a result of the pandemic. Keep in mind, was already taking this trajectory as the average duration borrowers stay in a home is 13 years.
Are you considering student loan deferment? Is the COVID-19 crisis causing you to rely on credit cards or personal debt with higher interest rates? Consider consolidating non-mortgage debt with a new mortgage refinance.
Refinancing that debt will not only free up cash flow by combining your balances into one affordable monthly payment, but you may be able to save money by lowering your overall interest expense.
This may be a great solution for those with little to no emergency funds saved, should economic uncertainties result in unemployment or should other unforeseen events cause financial hardships.
Nobody plans to get in a car accident or fall off a ladder, but it can happen when you are most vulnerable. Refinancing can provide you with a cushion against life’s unexpected turns.