Mortgage refinancing can offer different benefits depending on the borrower, but it can generally provide a better rate, shorter loan term, lower monthly payments, and more predictable costs. Since it helps homeowners handle their finances better, many of them rushed to refinance their homes when the coronavirus pandemic hit last year and caused the economy to come to a halt. While it can help homeowners save money and ease their financial burden, these benefits can only be enjoyed when they do it at the right time.
Is It Advisable to Refinance during Pandemic?
March 2020 was a crucial time for many countries. During this time, the effects of the pandemic were felt worldwide. To stabilize financial markets and soften the economic impact of the crisis, the Federal Reserve devised a monetary policy. This includes reducing the federal funds rate. It also pledged to purchase 80 billion dollars in Treasury notes and 40 billion dollars worth of mortgage-backed securities monthly.
These efforts to inject money into the country’s economy resulted in lower interest rates. This is because mortgage rates are tied to the ten-year Treasuries. Mortgage rates indeed went down, reaching a record low of 2.65 percent on January 7, 2021. Rates eventually have climbed over the previous months. On the other hand, treasury yields have made a comeback. From an all-time low of 0.48 percent, it rose between 1.3 and 1.5 percent.
Recently, rates and yields have reached a plateau. Since economists predict that mortgage rates will start to increase, homeowners planning to refinance are encouraged to act as soon as possible.
How Do Homeowners Know When to Refinance the Mortgage?
A good rule of thumb is to have a current mortgage rate above 3.88 percent for homeowners to get the benefits of refinancing. A sign that it’s wise to refinance is if the current interest rate can be reduced by 0.5-1 percent. To determine the right time to refinance, here are several factors to consider:
- Credit Score: Borrowers must have a credit score of at least 620 to qualify for a mortgage refinance, while they need a 740 to get the lowest mortgage rate. For homeowners with a less-than-desirable credit score, they may not qualify for a favorable rate.
- Debt-to-Income Ratio (DTI): Borrowers applying for conventional home loans can work with lenders with a DTI as high as 43 percent. If they are planning to secure an FHA loan, DTIs of 50 percent are usually accepted.
- Amount of Equity in the Home: Homeowners must have at least 20 percent equity in the home to qualify for a mortgage refinance.
- Amount of Time Homeowners Will Be Staying in the Home: Refinancing involves paying closing costs. To break even, borrowers must plan to stay in the home for a long time.
Millions of qualified mortgage borrowers could reduce their interest rate on their loans by at least 0.75 percent. According to data analytics firm Black Knight, they could save a total of 4.5 dollars billion in monthly payments. Many homeowners have already chosen to refinance, but many more are yet to take advantage of this. In some cases, there is a benefit to refinancing even if we can not lower the rate or if it goes up. This would be a cash-out refinance where we consolidate higher interest rate debt and reduce the monthly outgoing monthly payments. This can add hundreds to thousands of dollars per month and can be utilized towards student loans, debt consolidation, and home improvement. If it makes financial sense for you to refinance your mortgage right now, seek mortgage loan solutions.
Contact American Mortgage Solutions Now!
Refinance your mortgage by contacting American Mortgage Solutions. We help homeowners in Kentucky you can give us a call at (502) 327-9770 or in Florida please call (239) 766-8344, Tennessee, Colorado and Indiana to get more competitive rates and terms.