Record low mortgage rates equal big refinance savings
Mortgage rates have hit record lows nine times this year, and that spells big savings opportunities for homebuyers and refinancers.
In fact, refinance rates are low enough that data firm Black Knight estimates 2.5 million people could save $500 or more per month by refinancing.
With FHFA’s ’Adverse Market Refinance Fee’ rapidly approaching, it’s prime time to lock in a rate if you’ve been considering a refinance this year.
There’s a chance today’s rates are as low as they’re going to get in 2020.
19 million homeowners are in the money to refinance
The number of homeowners refinancing is already through the roof.
Black Knight found that refinance loan originations hit a 17-year high in July, an increase of 200% over the same time last year.
This puts nearly 20 million U.S. homeowners “in the money” to refinance — meaning they’d see significant savings.
And the opportunities for eligible refinance borrowers keep getting better.
’High-quality’ refi candidates could save $299 per month
According to Black Knight’s research, there are 19.3 million “high-quality” refinance candidates in the U.S.
These are homeowners with at least 20% equity in their homes and a credit score of 720+, who could reduce their interest rates by at least 0.75% by refinancing at today’s rates.
Black Knight estimates that the average monthly savings among high-quality borrowers is $299.
Looking at all 30-year mortgage-holders (not just “high-quality” candidates), the same report found that there are 32 million homeowners paying interest rates 0.75% above average.
Many among this group could also be great refinance candidates.
How much could you save by refinancing?
If you think you may be able to refinance but aren’t sure how much you’ll save, try running the numbers on a refinance calculator.
You can input your current interest rate and the average rate today to receive an estimate of what your new monthly payment will look like.
But know that the actual amount you can save will vary based on your circumstances.
Lenders evaluate refinance applications based on:
- How much equity you have in the home
- Your credit score and history
- Your current income and employment status
- Your existing debts
The better those numbers are, the lower your interest rate is likely to be.
If you haven’t built up much equity or can’t secure a significantly lower rate, then it may not be worth refinancing.
And if you’re not offered the same ‘ultra-low’ rates you see advertised, remember to keep historical context in mind.
At this time two years ago, the average rate on a 30-year fixed-rate mortgage was 4.65%.
So, even getting down to a 3.25% rate (as opposed to, say, 2.75%) could save you several hundred dollars a month.
Refinance costs could increase soon
Mortgage and refinance rates are currently near their lowest levels in history. But refinance rates are almost guaranteed to rise in the near future.
The reason? FHFA’s new Adverse Market Refinance Fee.
This new fee will be applied to most conventional refinances. (Loans under $125,000 will not incur the fee.)
It’s calculated at 0.5%, or $500 per $100,000 borrowed. However, most borrowers won’t pay that amount upfront.
Instead, their fees will likely be covered with a 0.125% to 0.25% higher rate.
Although lenders won’t be obligated to pay the fee until December, they’re likely to start rolling the cost into their loan prices beginning in October.
So if you’re ready to refinance now, you may want to act quickly.
How to get the best refinance deal right now
To take advantage of low interest rates before the Adverse Market Refinance Fee kicks in, compare different lenders’ terms to see who is offering the best deal.
Once you’ve decided which company you want to work with, move quickly to submit your application and get started on the loan.
You’ll also need to determine which type of refinance loan works best for you — for instance, whether you want a straightforward refinance to lower your monthly payments or you want a cash-out refinance to have some liquid cash available for unforeseen expenses.
Depending on the type of mortgage you have, you may be eligible for a “streamline” refinance option:
- The FHA streamline refinance is considered a “low doc” program because you won’t have to submit income verification or schedule an appraisal to qualify for the loan. There’s also no credit check, so loan processing can be completed much faster than with a traditional refinance
- The VA’s interest rate reduction refinance loan (IRRRL) is a similar program. It does not require income or employment verification, and you may be approved without an appraisal. The IRRRL is available even to borrowers with little or no equity in their homes, creating an opportunity to save even if you haven’t been able to pay down a large portion of your mortgage yet
If you want to take advantage of the current low refinance rates but aren’t sure what your options are, contact your lender.
They can explain their different loan programs and help you understand what you might qualify for.
And if you aren’t quite ready to refinance, perhaps because you’re working on improving your credit score or are trying to build more equity, don’t rush into the decision.
Mortgage rates will likely stay low for several years because of pandemic-driven economic uncertainty, so you may still be able to secure a lower rate when refinancing is right for you.