Whether the economy is humming along smoothly or faltering because of a national crisis, it can often be difficult to satisfy your monthly mortgage payments. The nature of personal finances has a tendency to ebb and flow—meaning you could be flush with cash one day, then scrimping and saving the next.
Today’s world, for example, has been drastically changed by the COVID-19 pandemic and continuing quarantine. For some people across the country, making ends meet has become twice as difficult compared to just prior to the pandemic.
We all know the big picture. The 30,000-foot view of the coronavirus pandemic shows periods of economic quiet, followed by stretches of fiscal turmoil. Let’s take a quick look at one moment in time as an example of the difficulties we’ve faced:
Between April 18 and 30, more than 30.3 million Americans sought unemployment benefits after being laid off or furloughed. Workers throughout the nation had their hours slashed to part time, their salaries reduced or lost their job altogether.
As such, people were looking for ways to lower monthly payments and save money wherever possible. And refinancing was one way they quickly found out they could do so.
Despite the ever-changing economic climate, the pandemic proved to be the perfect time to refinance your mortgage. Back in March, the Federal Open Market Committee (FOMC), the Federal Reserve’s monetary policymaking panel, cut interest rates twice, reducing rates to between 0 and 0.25 percent. FOMC also purchased $700 billion in Treasury bonds and mortgage-backed securities—all to help households, businesses, and banks during these unprecedented times.
The rate cut directly impacts mortgages, while the 10-year Treasury yield, which fell to lows between 0.38 to 1.038 percent after the cut, are tied to long-term loan rates. This results in low mortgage interest rates. Prior to these actions, mortgage rates had already dipped to below 4 percent. Fox Business reports, “Currently, the average rate for a 15-year fixed mortgage refinance is 3.27 percent and a 30-year is 4.1 percent.”
And here we are in June, and mortgage rates are still at historic lows. According to NerdWallet, the 30-year fixed rate mortgage averaged 3.365% APR in May. And though refinancing has leveled off this month after a surge in April and May, the number of applications submitted is still double what it was at this time last year.
If your current mortgage interest rate is above 4 percent, you should refinance to take advantage of these low percentages.
Lowering your interest rate could save you thousands of dollars in the long run and lessen your monthly payment. Instead of worrying about paying that extra $100 to $200 before refinancing, you can use it to spend on food for your family. Or, it may just be the decrease you needed while you’re out of work to keep up with mortgage payments. In either scenario, it reduces your financial burden.
You can also get a fixed-rate mortgage loan to avoid any future increases or switch to a 10- or 15-year loan term instead of 30 to save on interest.
Plus, if you have equity in your home, you can refinance to get access to those funds. If your home has appreciated in value or it’s worth more than you owe, you can cash-out refinance. This involves getting a loan that replaces your mortgage by paying it off, then refinancing the current mortgage, leaving you with the difference in cash. This money could be used to pay for day-to-day expenses while you’re out of work or to make up for lost wages if your salary has been cut.
So, how do you refinance during an economic crisis? You’ll follow the basic refinancing steps you would take at any other time. These include:
What do you wish to accomplish by refinancing? Do you want to lower your monthly payments or get extra cash? Your answer to these questions will determine which type of refinance loan you need: rate-and-term, fixed-rate, adjustable-rate, cash-out, cash-in, and Home Affordable Refinance Program.
In such a volatile time, it’s best to consistently check on interest rates to see if they’ve continued to drop or gone up a few percentage points. Check multiple lenders to find the lowest rates.
Once you’ve found the lowest rate, apply for the loan. You’ll need your pay stubs, federal tax returns, bank statements, identification, and other documentation. The lender will verify your credit score. During a pandemic, this may involve an online or phone meeting to ensure a safe interaction. Documents may need to be sent by mail or uploaded online.
The Federal Housing Finance Agency (FHFA) stated, “In the event lenders cannot obtain verbal verification of the borrower's employment before loan closing, the Enterprises will allow lenders to obtain verification via an email from the employer, a recent year-to-date pay stub from the borrower, or a bank statement showing a recent payroll deposit.”
During an appraisal, a licensed independent professional will evaluate the value of your home and similar properties in person. Because of social distancing rules in effect, the FHFA directed lenders to utilize appraisal alternatives such as looking at comparable sales without visiting the home or virtual visits to inspect the interior of homes. This guarantees the health of borrowers and lenders are put at risk.
You’ll need to pay closing costs, which are typically 2 to 6 percent of the loan amount you’re taking. Before deciding to refinance, you may want to consider how many years it will take to recoup these costs, when you’ll break even, and if it’s worth the savings.
During an economic downturn, rates can bottom out while the need to reduce monthly costs remains high. This leads many to seek out ways to refinance their mortgage. If you choose to do so during a pandemic or any crisis, you may need to be patient as lenders are receiving tons of applications. However, this should not deter you from taking advantage of the many benefits refinancing can bring during times like these. Saving money and cashing out can lessen your financial worry and enable you to focus on what really matters: ensuring you and your family are safe and healthy.
To refinance your mortgage, contact Contour Mortgage today by calling 516-385-6900 or emailing us at info@contourmtg.com.