With the coronavirus outbreak refinancing may be a bit of a challenge. With mortgage rates near rock bottom, is it a good time to refinance a mortgage? The answer to this is isn’t simple.
In April, the record low rates resulted in massive refinancing activity just as many lenders were transitioning to remote work environments because of the spread of COVID-19. This affected work resulting in huge backlogs for lenders and borrowers ended up in delayed closing of their refinances.
The market now however seems to have settled down as both borrowers and lenders have adapted to the new normal. The new work culture involves markets being served either by mobile notary services or the mortgage processes going virtual in some states. This rules out health risk due to infection by COVID 19.
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The question now is entirely different- how risky will refinancing your mortgage be at this time?
Generally, you first determine how long you plan to stay in your home, consider your financial goals and know your credit score. All of these things, along with current refinance interest rates, should play a role in your decision.
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So during this turbulent time, what is it that you need to consider for refinancing?
- Lower interest rate:
If a homeowner can find an interest rate 50-75 basis points lower than his/her current mortgage rate, refinancing in that case may be termed worthwhile as the lower interest will make up for the closing costs involved with a refinance. However, one must keep in mind that the savings do not occur overnight! It will be a few years before the savings can outweigh the costs involved.
According to Holden Lewis, home and mortgage expert, it is worthwhile to refinance with only a half-point reduced rate if the home-owner is in his/her forever home. Else, if the homeowner plans to sell it off in a few years’ time, he may end up paying more in fees than in saving.
2. The Loan Term:
In Canada, most mortgages come with an amortization period of 30 years. This is the amount of time taken to pay back the entire mortgage amount. Over the course of the amortization period, the mortgage term will be renewed multiple times.
The mortgage term commits the borrower to a mortgage rate, the lender, and the conditions set out by that lender. These terms vary in length from 6 months to 10 years, with 5 years being the most popular term.
The amount of time remaining on the mortgage term will be a defining factor in any refinancing decision. To refinance, the current mortgage term needs to be broken, which will come with financial penalties. The more time left on the current term, the more substantial the penalties.
Any refinancing decision must carefully consider the savings of a better mortgage rate versus the costs of breaking a current mortgage term.
3. Closing costs:
Paying closing costs upfront may appear to be an expensive proposition, in reality; it could be just the opposite and help you save money.
Don’t be tempted by ‘no cost’ advertisements by lenders; remember that no matter how attractive the idea may be, you will end up paying that amount during the life of the loan or lead to a higher interest rate.
You can also save a huge amount in interest if you prepay interest by paying for mortgage points but the upfront cost will be higher. At the end of the day, it is your choice depending on what you want.
4. Timing the Market:
The mortgage rates have fallen to a record low numerous times in 2020 fueled by effect of the coronavirus pandemic on the stock and bond market. With another surge in infections across many states, the rates may well fall more. However, on the flip side if a vaccine soon out in the market as claimed by various researchers and health experts, the rates may cause markets to rally and mortgage rates to spike overnight. Bottom-line? It’s risky both ways to wait and watch the market. Hence, it’s advisable to pick the rate that makes the most sense to you instead of a constant wait for rates to fall further.
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Factors that may affect you adversely
- Unemployment or Self-employment:
COVID has affected business and lives adversely- business organisations both big and small have been forced to close down, millions of people have lost their jobs and markets affected. This has led to lenders changing the standards of qualification for loan applications. They have mandated higher minimum credit scores and lower debt-to-income ratios. This has made it all the more difficult for a person opting for refinancing to qualify for a loan.
Although the job market seems to be looking up gradually, economic recovery is still a long way off. With many states experiencing resurgence in infections, the immediate future looks dismal. This may lead to lenders turning even more stringent with their standards of qualifications.
If you have been temporarily/permanently laid off work or you are self-employed, you may face problems getting an approval for refinance. In such a case, it is always better to fall back on your current lender as you would face fewer roadblocks. From the point of view of a lender, he would be willing to offer refinancing deals to existing customers rather than lose business.
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Conclusion:
Homeowners need to make the right call for refinancing while taking into account personal circumstances, including your current rate and how long you plan to stay in the home. Generally speaking, a half-point differential or more, combined with a timeline of at least a few more years in the house, makes refinancing worth the hassle.
Need more information? Call me at 647-295-5219 or email akhan@ashabkhan.com
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