Mortgage refinancing just got more attractive thanks to the combination of a decline in mortgage rates over the past few weeks and the end of a much maligned federal fee on refis. The average rate on a 30-year refinance fell 3.03 percent this week, down from 3.11 percent last week, according to Bankrate’s national survey of lenders.
Many in the mortgage industry expected the refinancing boom to subside as the economy recovered from the coronavirus recession. Instead, the spread of the delta variant of COVID-19 has rocked the financial markets.
There is a new way for homeowners to benefit from low refi rates. “A lot of people who thought they might have missed the boat the first time, might be interested now,” said Sebastian Hart, senior manager of capital markets at mortgage lender Better.com.
Mortgage refinancing rates move in favor of borrowers for several reasons. In a driver last week, mortgage regulators said they would end a much-criticized markup on refinances. That Federal Housing Finance Agency announcement came Friday morning, and lenders cut refi rates on Friday afternoon.
“As soon as that announcement was made by the FHFA, the lenders were in a hot mood,” says Robert Humann of Credible.com.
Homeowners have also reacted by taking advantage of the fall in prices. “Our pipeline has grown 20 percent in a week,” said Gordon Miller, owner of Miller Lending Group in Cary, North Carolina.
Mortgage rates are falling across the board
The federal fee of 0.5 percent of the refinancing amount was paid by the lenders, not the borrowers. In response, lenders raised refinancing rates by about 12.5 basis points, or 0.125 percentage points, over the past year.
Some lenders cut the interest rate on 15-year fixed-rate loans to less than 2 percent, and they dangled 30-year refinancing contracts from well below 3 percent. The moves could revive a refinancing boom that was in full swing earlier this year.
The other factor driving down mortgage rates is the coronavirus resurgence, which is raising new questions about the future of the economic recovery. Given these concerns, the yield on ten-year government bonds fell to 1.28 percent on Wednesday. The 10-year treasury – a key benchmark for 30-year mortgage rates – was 1.5 percent a month ago.
How To Refinance Your Mortgage
Step 1: Set yourself a clear goal
Have a compelling reason to refinance. You may cut your monthly payment, shorten the life of your loan, or withdraw equity for home repairs, or pay back higher-interest debt. You may also want to turn your HELOC into a refi.
What is to be considered: If you lower your interest rate but reset the clock on a 30 year mortgage, you may pay less each month but more for the life of your loan. This is because the repayment includes prepayment interest in the first few years of a mortgage.
Step 2: check your credit history
You must qualify for a refinance just as you would for approval of your original home loan. The higher your credit rating, the better refinancing rates lenders will offer you – and the better your chances of the underwriters approving your loan.
What is to be considered: Lenders have become tighter on lending during the pandemic, so the creditworthiness of the typical mortgage borrower is higher than ever today. While there are ways to refinance your bad credit mortgage, it may be wise to spend a few months improving your credit before starting the process.
Step 3: find out how much home you own
Your home equity is the value of your home in excess of what you owe your mortgage lender. To find this number, check your mortgage statement to see your current balance. Then check the online home search pages or have a real estate agent do an analysis to determine the current appraised value of your home. Your home equity is the difference between the two. For example, if you still owe $ 250,000 on your home and it’s worth $ 325,000, your home equity is $ 75,000.
What is to be considered: You can refinance a conventional loan with as little as 5 percent equity, but you get better interest rates and fewer fees (and don’t have to pay private mortgage insurance or PMI) when you have more than 20 percent equity. The more equity you have in your home, the less risky the loan is to the lender.
Step 4: buy in multiple mortgage lenders
Getting quotes from multiple mortgage lenders can save you thousands. After choosing a lender, discuss when it is best to lock your interest rate so you don’t have to worry about interest rates going up before your loan ends.
What is to be considered: In addition to comparing interest rates, pay attention to the cost of the fees and whether they are due in advance or are included in your new mortgage. Lenders sometimes offer refinancing with no closing costs, but charge a higher interest rate or increase the loan balance to compensate.
Step 5: bring order to your paperwork
Gather up-to-date pay slips, federal tax returns, bank statements, and anything else your mortgage lender requests. Your lender will also look at your creditworthiness and net worth, so disclose your assets and liabilities upfront.
What is to be considered: If you have your documents ready before the refinancing process begins, it can go more smoothly.
Step 6: Prepare for the Assessment
Mortgage lenders usually require a mortgage refinancing assessment to determine the current market value of your home.
What is to be considered: You pay a few hundred dollars for the report. Informing the lender of any improvements or repairs you’ve made since purchasing your home can result in a higher rating.