In the midst of the COVID-19 panic and the Federal Reserve’s unprecedented and ongoing actions to stabilize markets, bond yields have fallen dramatically. So, is now a good time to refinance your mortgage?
Since the start of March, the bond market and rates have been extremely volatile, with wild swings during the last few weeks — and even intraday. The 10-year Treasury bond yield, which began the year at 1.88%, hit an all-time low of 0.318% in overnight trading on March 8 and currently is trading around 0.66%.
Mortgage brokers have been overwhelmed by this volatility and increased demand for refinancing, so much so that mortgage rates initially increased during the first weeks of the crisis. They since have come down and could drop further. Changes in mortgage rates typically lag behind rate changes in the bond market.
Things for borrowers to consider when deciding whether to refinance
Know the rates. There are many free interest rate calculators online, so check and compare several sources to identify the best terms. On one popular website today, we are seeing the 30-Year Fixed Rate at 3.25% and the 15-Year Fixed Rate at 2.75%. Mortgage brokers are reporting multiple price changes in a day — so you may want to consider locking in a rate. Many lenders are locking rates for up to 90 days for refinances and 30 days for purchases. Note that rates to refinance are typically slightly higher than those for original loans. Also, loans for secondary residences or investment properties generally carry a premium.
Know the closing costs. The cost of a loan — think bank fees and fees associated with appraisal and title — typically ranges between $2,000 and $3,000. Also worth noting: some lenders — usually only smaller local and regional banks — might drop the fees for closing costs on loans that they originated and still hold and service if you ask. So, ask. Mortgage brokers generally are able to process and close loans with no human contact, including appraisal and digital closing completed on the web.
Know when you’ll reach break-even. If those closing costs aren’t waived, borrowers will have to weigh them against any potential savings from the lower rates— factoring in how long they plan to hang on to the home. For mortgages with only a few years left, or a home that could be sold in just a few years, a refinance might not make sense.
Pay attention to the nuances of refinancing certain home loans. Before deciding whether to refinance, it is smart to be familiar with the tax rules governing what is or is not deductible when it comes to interest payments. Remember that mortgage interest is deductible only if you itemize deductions. Taxpayers who instead choose to use the standard deduction do not benefit. Although the Tax Cuts and Jobs Act of 2017 reduced the mortgage debt that can qualify for the deduction from $1 million to $750,000, mortgages already in place on December 15, 2017 were grandfathered. Those taxpayers are also grandfathered if they refinance their mortgages. So for a taxpayer who has a $1 million mortgage that has been paid down to $800,000, the entire $800,000 can be refinanced, and the deduction is not limited. Further, it appears that the taxpayer even could refinance back to the original $1 million mortgage as long as any cash taken out is used to upgrade the home. As always, we advise you to consult with your tax advisor to discuss these rules.
Mortgage brokers are overwhelmed at present — so if you want to refinance, be prepared to make the process as easy for them as possible. It is important to get in the pipeline as soon as possible after determining that you want to refinance. Have all of your documentation ready to go — and know that processing times could take longer as more people fill the pipeline. Also know that banks may try again to slow the volume of requests by raising rates.
Please let us know if you would like to discuss if refinancing is appropriate for you.
The content contained in this article represents the opinions and viewpoints of Cardan Capital Partners only. It is meant for educational purposes and not meant for consumer trading decisions. All expressions of opinion are as of its publishing date and are subject to change. There is no assurance that any of the trends mentioned will continue in the future. Market performance cannot be predicted, so nothing in our commentaries is ever meant to provide any kind of guarantee of future results.