Summary: The national response to the COVID-19 outbreak has driven mortgage interest rates to record lows. States are making every effort to keep the real estate transactions moving along. Home owners should refinance if the savings are significant and their financial affairs remain intact.
A generation ago, few could even imagine mortgage rates as low as exist today. Even before the COVID-19 pandemic, interest rates were extremely attractive. After intervention by the Federal Reserve Board of Governors, they are sinking lower. With all of the potential savings this decline can promise, mortgagees in Washington, Oregon, Colorado and Idaho wonder whether they can make their loans a little less pricey by refinancing. For sure, monthly remittances will be cheaper, but by how much? Are the savings sufficient to justify the cost of a refinance? Weighing the saved money per month against the fees and charges associated with a new loan is but one indicator in the refinance decision.
Will Stimulus Stimulate?
The precautions related to slowing the coronavirus have ground the national economy nearly to a halt. Businesses of all kinds and sizes have laid off multitudes of employees, some closing operations altogether. Unemployment rolls are swollen by the millions, supply lines are interrupted and the government promised income checks to hordes of displaced workers. To keep businesses viable, the leadership of the Federal Reserve sought to make borrowed money less costly by lowering its benchmark interest rate, under which financial institutions lend to each other, effectively to zero percent. While the Fed lowering their Fed Funds Rate to zero doesn’t directly impact mortgage rates, other stimulus the Fed is providing does have a direct impact. This includes the purchasing of Mortgage Backed Securities.
Over the past several weeks the Fed has been purchasing billions of dollars of Mortgage Backed Securities which has helped push mortgage rates to record lows. While it’s impossible to know for sure whether rates will continue to move lower there are signs that low rates are here for the foreseeable future. Huge government debt, an economy in the midst of a recession and possibly worse, along with minimal inflationary pressures is a perfect combination to keeping long-duration rates low.
Should you refinance now or wait? Timing the market is difficult but if you can save money on interest with little to no closing costs there is little downside to refinancing. If rates continue to drop in the future you can always look to refinance again down the road. With the current economic slowdown many will face job uncertainty not to mention the possibility of declining values.
Real Estate Transactions in the States
Like most states, Washington is under a shut-down order by the governor. Although real estate undertakings, including refinances, are considered essential but are subject to certain limitations. Appraisals and inspections must be performed by appointment, no more than two people may occupy a property at a given time, all the while maintaining social distance. Face-to-face meetings are to be avoided unless absolutely necessary. Fortunately, many appraisals are currently receiving property inspection waivers or drive-by appraisals on refinance transactions.
Similarly, Colorado categorizes real estate as a “critical business” during the coronavirus pandemic. Most services are permitted under social distancing regulations. Open houses and walk-throughs are understandably prohibited, perhaps a factor in the predicted purchase slow-down. Title companies are offering “drive-thru” settlements whereby most of the legwork is done over the phone and documents are executed in the isolation of the car. Here, too, refinances happen within the parameters of the law and best health practices.
The state government issued guidelines relative to real estate operations and mortgage banking. In all cases, realtors are instructed to opt for virtual tours and other forms of marketing. Teleconferencing and video meetings should replace personal encounters when interviews and negotiations are in order. The good news is that title companies and closing agents have been adapting to this type of remote commerce for the last few years and almost everything necessary for processing, underwriting, and closing refinance transactions can be performed electronically or, when absolutely necessary, with all parties separated at safe distances.
Like the above jurisdictions, Idaho makes allowances for real estate buying, selling and refinancing. Business observers see no decline in the enthusiasm for refinancing on the part of homeowners. Lenders are fully equipped to originate and approve loans online. With restrictions on appraisals and a general increase in applications, getting to settlement may take somewhat longer than usual. Still, title companies are still conducting closings, keeping non-signers off the premises and confining signers to completely sanitized meeting rooms. In some places, drive-up settlements are possible. In short, it can happen with patience.
Should I Refinance My Home?
With the knowledge that mortgage refinance is relatively safe, both legally and biologically, prospective borrowers must examine their individual circumstances as to whether replacing the current mortgage is a wise decision. Certain financial and legal issues are worthy of consideration.
Employment and Income
While one should never say never, temporary layoffs due to COVID-19 make it difficult for lenders to obtain employment verifications. If the business is shuttered, this is virtually impossible. If the workforce is downsized, and the prospect of return is assured, a lender might be flexible regarding income and employment. Working in a sidelined applicant’s favor is that federal investors like Fannie Mae and Freddie Mac have loosened some of their standards during the pandemic. This frees the lenders to do likewise, especially if all other credit touchstones are in good shape. Although this is no guarantee of approval, it does demonstrate that lenders are willing to cut loan candidates some slack in the face of extraordinary times. Under ordinary conditions, no regular income means no mortgage forthcoming in most cases.
Rate on Current Loan
Even before the Fed’s aggressive move on rates, they were already relatively low. Will any potential savings make up for the costs associated with applying for and closing another home loan? How long you stay in your house can help determine when you break even and begin to save.
3 good questions to ask if you presently have a low-rate mortgage:
- Will refinancing with a shorter term help me to pay off the loan faster?
- Does my equity allow me to take cash out when refinancing?
- Will refinancing require me to pay mortgage insurance?
The ideal answers should be yes, yes and no. If so, fire away. One more consideration: now is the time to switch to fixed-rate if your current mortgage is adjustable. Low rates are not a perpetual guarantee.
Credit Scores and Debt
Especially for the temporarily unemployed, good credit becomes all the more important for gaining the confidence of underwriters. If, since the last mortgage closed, a borrower has taken on a larger volume of consumer debt, it may show up in the FICO score and will definitely affect the debt-to-income ratio so important when evaluating applications. Despite the attractiveness of the new rates, prospects should review their credit report with a loan officer. While lenders are making accommodations due to COVID-19, they can not let everything slide.
Liens and Judgments
Along the same lines, if a borrower has incurred liens or judgments that are attached to the property since closing on the current mortgage, a lender will condition the refinance on paying those off or, alternatively, getting them discharged. Depending on the size of these claims, it might make sense to delay refinancing until these matters are settled once and for all. The title company can not issue a clean policy to the lender as long as a lien or judgment stays in place. Furthermore, they may not appear on the credit report, showing up only on the title report.
Seek Professional Consultation
In deciding whether or not to refinance, potential applicants do well to discuss their situation with a mortgage professional. This expert knows from experience when refinancing makes sense…and when it does not.
Sammamish Mortgage has been around since 1992, and we’d love to help you with our expertise. Based in the Pacific Northwest, Sammamish offers high quality mortgage loan programs in Colorado, Oregon, Idaho, and Washington.
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