During economic downturns, one silver lining is the availability of cheaper credit, particularly noticeable during global crises like pandemics when mortgage rates often decrease. This scenario presents a prime opportunity for homeowners to consider refinancing their mortgages, especially with rates near historic lows. As someone who has refinanced multiple properties numerous times since 2003, I’d like to offer some practical advice to help you secure the lowest fees and interest rates possible.
Firstly, it’s wise to start by checking the latest mortgage rates online through a marketplace. These platforms connect you with a broad network of lenders, providing you with competitive quotes quickly and without obligation.
Refinancing can seem overwhelming, but with the right guidance and mindset, it can be a manageable process.
My own refinancing experience includes securing a 7/1 ARM at 2.625% with no costs for my primary residence in late 2019, and then getting preapproved for a 7/1 ARM at just 2.125% in 2020 as rates continued to drop. Thanks to having substantial assets with my lender, I benefit from relationship pricing. However, competitive rates are still accessible to others; for example, a 7/1 ARM could be obtained for around 2.5% in 2021 and beyond.
Here are some key refinancing tips based on my extensive experience:
- Inflation’s Impact on Mortgage Rates: Understanding the relationship between inflation and mortgage rates is crucial. Recently, there has been significant monetary expansion, hinting at potential inflation increases. This inflation expectation can affect mortgage rates, which are often linked to the 10-year US treasury yield. Monitoring these rates, especially during stock market downturns, can indicate opportune moments for refinancing.
- The Importance of Matching Duration: Align your fixed-rate duration with your property ownership or mortgage payoff plans. For long-term ownership, a 30-year fixed mortgage might be suitable, whereas a 5/1 ARM could be more appropriate for shorter-term plans, especially in a low-inflation environment.
- Refinancing Costs Matter: Consider the total refinancing costs versus the monthly savings to determine your break-even point. This calculation will help you decide whether refinancing is financially worthwhile.
- Choosing Between Fixed and Adjustable Rate Mortgages: A 30-year fixed loan offers payment stability but generally comes at a higher rate. Adjustable Rate Mortgages (ARMs), on the other hand, typically offer lower initial rates but carry the risk of rate increases in the future. Your choice should be informed by your predictions about future interest rates and inflation.
- The Hassle Factor: Refinancing involves time and effort. If your current rate is significantly higher than the market rates, the savings might be worth the hassle. However, if you’re content with your current loan, busy, or have a high income, the savings might not justify the effort.
For those with mortgage rates above 4%, now is a good time to explore refinancing options. Contact your bank to inquire about current rates for various loan durations. Remember, the goal is to find a rate at least 1% lower than your current one, align the fixed rate duration with your property plans, calculate the break-even point, and consider refinancing if you plan to stay in your home for more than five years and the break-even period is less than 20 months.
Lastly, the current pandemic has created unique opportunities in the real estate market. With mortgage rates at an all-time low and motivated sellers, it’s an opportune time to consider buying.
