When refi rates fall again, be the first in line
Mortgage rates have hit record lows again and again this spring. But something strange is happening.
In recent weeks, rates for home buyers hit new lows while rates for refinancing stayed relatively high.
That’s largely because lenders are still overwhelmed by the huge volume of refinance applications from early spring.
But lending is starting to open back up. And there’s a good chance refi rates could drop again.
If you haven’t been able to refinance this go–round, you should position yourself to be first in line when next the opportunity comes up.
Here’s how to get ready.
1. Apply now, lock later
If you apply for a refinance loan now, you’ll have gotten past the initial hurdle. This will allow you to act that much faster next time rates drop.
You can go through the whole application process, but wait to lock until you get the rate you want. And you can hold off on the appraisal as well.
Then as interest rates go down, you can request to lock and move forward with the loan. But having started the application in advance will put you ahead of everyone else who’s trying to catch the next wave of refinancing.
Having started the application in advance will put you ahead of everyone else who’s trying to catch the next wave of refinancing.
Remember, lender overwhelm is a big reason for the current rate increase and tightened application process. To avoid those issues in the future, you want to get in while lenders have the capacity to process your loan – not when everyone else is just beginning to apply.
Chances are lenders will become overwhelmed again, which could lead to another slowdown, which is why you want to be prepared ahead of time.
2. Pay attention to rate reports
Your goal is to be ahead of the game the next time rates drop, so keep an eye on news reports about rate cuts and mortgage applications. If further drops are forecasted, you may want to move quickly on your loan.
If you’re still not sure whether it’s a good time to lock, talk with your lender. Ask whether they think rates will likely go lower, and walk through the different scenarios with them. What do you gain by locking now? What are the chances you’ll benefit from refinancing later?
3. Know your limits
While it seems likely that rates will go down again this year, there’s no guarantee that that will be the case. In fact, the opposite could happen, and rates could actually go up.
If you get to a rate that is a substantial improvement over what you’re currently paying, you may want to lock it in to avoid missing out if rates increase.
Your goal is likely to make your mortgage more manageable, so be realistic and prudent as you wait for the next big moment.
4. Keep your credit score high and your debt–to–income ratio low
If your credit score isn’t within the good–to–excellent range, see if you can pay down some existing debt while you’re waiting to refinance. Not only will that boost your score, but it will also lower your debt–to–income ratio (DTI).
Lenders want to see good scores with clean credit histories, and they want to know you can make the monthly payment on your loans.
Your DTI could be especially important if you want to take out a cash–out refinance loan. That’s because you’re asking your lender for more money, which means higher monthly payments. The lower your DTI, the less risky you’ll appear on your application.
Avoid opening new loans and credit accounts while you wait to jump on the next drop in interest rates.
But low DTI is a key factor regardless of what type of refinance loan you’re pursuing, so avoid opening new loans and credit accounts while you wait to jump on the next drop in interest rates.
The best thing you can do to prepare for the next rate drop is to stay vigilant. Monitor your credit score and watch for news about a rate decrease, and don’t forget to check in with your lender.
Everything is uncertain right now because of the pandemic, but if you become complacent, you may miss out on an opportunity to save. Staying aware and starting your application early will help you get ahead of the pack.
What happened to refinance rates in 2020
Refinancing has been all the rage in 2020, even before the coronavirus pandemic drove mortgage interest rates to historic lows.
In late 2019, refinances were the highest they’d been in 6.5 years. Tthey represented 57% of all lending for the last quarter of the year, according to mortgage data firm Black Knight.
Then as the coronavirus spread in early 2020, it created market volatility and pushed interest rates even lower, sending homeowners scrambling to refinance.
Unfortunately for many, however, the rush on refinances overwhelmed lenders. To cope, they raised interest rates and tightened their lending criteria, slowing down approvals and leaving some homeowners out of the refinance boom.
Lenders also ran into issues with investors being reluctant to buy mortgages that were at risk of default, or which could be refinanced again soon during another rate drop. The result was that many homeowners missed their window on these low rates – for now.
But the opportunity isn’t necessarily gone. Interest rates could drop again in the coming weeks and months.
As refinance demand slows, lenders will likely start reducing their rates to entice homeowners once again. And if some lenders do it, others (such as the big banks) are likely to follow, creating fresh opportunities for homeowners to save.
If you take the time to get your application ready now, you could be in the position to capture an ultra–low rate before the next big refinance boom hits.