Mortgage refinancing just got more attractive, thanks to the combination of a plunge in mortgage rates in recent weeks and the end of a much-maligned federal fee on refis. The average rate on a 30-year refinance fell to 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 fade away as the economy recovered from the coronavirus recession. Instead, the spread of the Delta variant of COVID-19 has roiled financial markets.
For homeowners, there’s a new opportunity to cash in on low refi rates. “A lot of people who may have thought they missed the boat the first time around may be interested now,” says Sebastian Hart, senior manager of capital markets at mortgage lender Better.com.
Mortgage refinancing rates are moving in borrowers’ favor for a couple of reasons. In one driver, mortgage regulators said last week they were ending a widely criticized surcharge on refinances. That announcement from the Federal Housing Finance Agency came Friday morning, and by Friday afternoon, lenders were dropping refi rates.
“As soon as this announcement was made by the FHFA, lenders were hot on it,” says Robert Humann of Credible.com.
Homeowners have responded, too, by taking advantage of the drop in rates. “Our pipeline jumped 20 percent in a week,” says Gordon Miller, owner of Miller Lending Group in Cary, North Carolina.
Mortgage rates drop across the board
The federal fee of 0.5 percent of the amount of a refinance was paid by lenders rather than borrowers. In response, lenders last year boosted refi rates by about 12.5 basis points, or 0.125 percentage points.
Some lenders slashed rates on 15-year fixed-rate loans to less than 2 percent, and they dangled deals on 30-year refinances of well below 3 percent. The moves might rekindle a refinancing boom that was in full swing earlier this year.
The other factor pushing mortgage rates down is the resurgence of the coronavirus, which is sparking new questions about the future of the economic recovery. Reflecting those concerns, the yield on 10-year Treasury bonds has fallen to 1.28 percent as of Wednesday. The 10-year Treasury — a key benchmark for 30-year mortgage rates — stood at 1.5 percent a month ago.
How to refinance your mortgage
Step 1: Set a clear goal
Have a compelling reason to refinance. It could be cutting your monthly payment, shortening the term of your loan or pulling out equity for home repairs or to repay higher-interest debt. You may also want to roll your HELOC into a refi.
What to consider: If you’re cutting your interest rate but resetting the clock on a 30-year mortgage, you might pay less every month but more over the life of your loan. That’s because amortization schedules front-load interest charges in the early years of a mortgage.
Step 2: Check your credit score
You’ll need to qualify for a refinance just as you needed to get approval for your original home loan. The higher your credit score, the better refinance rates lenders will offer you — and the better your chances of underwriters approving your loan.
What to consider: Lenders became stricter about extending credit during the pandemic, so the typical mortgage borrower’s credit score is higher now than ever. While there are ways to refinance your mortgage with bad credit, it can make sense to spend a few months boosting your credit score before you start the process.
Step 3: Figure out how much home equity you have
Your home equity is the value of your home in excess of what you owe your mortgage lender. To find that figure, check your mortgage statement to see your current balance. Then, check online home search sites or get a real estate agent to run an analysis to find the current estimated 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 is worth $325,000, your home equity is $75,000.
What to consider: You may be able to refinance a conventional loan with as little as 5 percent equity, but you’ll get better rates and fewer fees (and won’t have to pay for private mortgage insurance, or PMI) if 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: Shop multiple mortgage lenders
Getting quotes from multiple mortgage lenders can save you thousands. Once you’ve chosen a lender, discuss when it’s best to lock in your rate so you won’t have to worry about rates climbing before your loan closes.
What to consider: In addition to comparing interest rates, pay attention to the cost of fees and whether they’ll be due upfront or rolled into your new mortgage. Lenders sometimes offer no-closing-cost refinances but charge a higher interest rate or add to the loan balance to compensate.
Step 5: Get your paperwork in order
Gather recent pay stubs, federal tax returns, bank statements and anything else your mortgage lender requests. Your lender will also look at your credit and net worth, so disclose your assets and liabilities upfront.
What to consider: Having your documentation ready before starting the refinancing process can make it go more smoothly.
Step 6: Prepare for the appraisal
Mortgage lenders typically require a mortgage refinance appraisal to determine your home’s current market value.
What to consider: You’ll pay a few hundred dollars for the appraisal. Letting the lender know of any improvements or repairs you’ve made since purchasing your home could lead to a higher appraisal.