Is It Time to Refinance Your Mortgage?

Worries about coronavirus have battered stocks and sent investors fleeing to the safety of U.S. government debt.

On Friday, the yield on the 10-year Treasury note fell below 0.7% for the first time. Earlier this week, the Federal Reserve cut its benchmark rate to a range between 1% and 1.25%.

Mortgage rates are expected to fall along with those yields. The 30-year fixed-rate mortgage averaged 3.29% during the week of March 5, according to Freddie Mac, and the 15-year fixed-rate mortgage dropped to 2.79%.

“Given the movement in Treasury rates right now, they’re probably going to go lower,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association. “I think low mortgage rates are going to be around for a while.”

If the yield on the 10-year Treasury declines even further, mortgage rates could drop more, too, though they don’t always move in lockstep with the government benchmark.

“This opens up a whole new world of refinancing for mortgage borrowers,” said Guy Cecala, publisher of Inside Mortgage Finance, an industry research group. “It’s a matter of time in terms of how fast lenders lower their rates to reflect a 10-year [U.S. Treasury note] and it’s also a question of how fast they want to go to that level, but at a minimum, we’re talking mortgage rates at 3.25% if not below 3% in the next few weeks, if everything stays the same—and frankly, that would be a once-in-a-lifetime refinancing opportunity.”

Whether it makes sense to refinance a mortgage now comes down to a host of personal factors. It depends, for example, on the cost of a refi, how long you plan to stay in your home, how much you hope to save, what you think your house is worth—and your view of the world economy.

“Yields have fallen quite steeply and the reason is that there’s concerns about a big slowdown in the global economy, largely because of the coronavirus,” said Kathy Jones, senior vice president and chief fixed income strategist at the Schwab Center for Financial Research.

For those considering a refi now, first look at the difference, or spread, between the current rate and the rate in the market. Then looks at costs, as a refinancing means paying significant closing costs—including title insurance and an appraisal—which can often amount to a few thousand dollars.

If the potential saving from a lower-rate mortgage doesn’t make up for those costs, it may not make sense to refinance just yet. “The old rule of thumb used to be two years,” Mr. Cecala said. “If you can pay it back within two years and you expect to be in the house five years, then why not do it?”

Rates have fallen before, so those who wait to refinance could potentially see even better ones. As the coronavirus continues to develop and its effects are felt around the globe, Mr. Cecala said the mortgage market could see even more changes.

Lauri Droster, branch director at RBC Wealth Management in Madison, Wis., suggests considering a refinance if there’s a difference somewhere between one-half a percentage point or 1 percentage point.

Ms. Droster said it’s easier for people to understand the potential saving when they make it personal. Calculate how refinancing could affect monthly mortgage payments rather than simply looking at the percentage difference and examining it in an abstract way.

“When they see it in real dollars, then they can make that comparison,” she said. “That’s where they can really see what it means, when they can see it in dollars and say, ‘I’m paying $1,500 a month right now for my mortgage and 1% lower is down to $1,200 a month.’”

For those with adjustable-rate mortgages, however, Mr. Cecala recommends borrowers check how often their rate adjusts. Most only do so once every six or 12 months, in which case some homeowners might want to refinance from an ARM to a fixed-rate, he said, to lock into low rates.

“If you’re saying ‘I’m planning on being in this home for the next five years, and I don’t want to worry about what’s happening with interest rates,’ that’s pretty much a no-brainer,” he said.

Those with high loan-to-value ratios, however, may not be able to refinance, despite the fact that they may want to do so. But Sam Khater, chief economist at Freddie Mac, said that with home values steadily rising over the past decade, this circumstance is rare.

Dan Egan, managing director of behavioral finance at Betterment, is himself considering refinancing his house. To him, the move makes sense because he and his wife have decided to also shorten the time period of their loan from a 30-year mortgage to a 15-year mortgage. Their net monthly payments could be higher as a result, but he’d be paying lower interest rates over a shorter time. His tax situation wouldn’t change as “the standard deduction is high enough.”

“My rate was 4% and it was a 30-year mortgage I am six years into, so I’m looking now, especially with the current softening in the stock market. If rates get a little lower, I could be looking at a new mortgage rate of 3.5%,” he said. “The difference between 4% and 3.5% may sound small, unless you’re looking at those interest payments over many years. So for myself, that change would mean saving somewhere around $500 a month, which is significant.”

With the mortgage rates dropping and refinancing interest growing, Mr. Cecala said that the math “gets easier.”

“The more you can adjust the interest rate, the more palatable it is to pick up closing costs,” he said. “If you’re saving $800 a month, you don’t balk at spending $8,000 in closing costs because you’ll make that back within a year.”

When it is worth refinancing

Home buyer puts 20% down on a home worth $266,300, the median home price in January.
No plans to move soon.
Pays a 4% rate, resulting in a monthly payment excluding taxes, fees and insurance of $1,017.09, according to LendingTree.
Dropping to a 3.25% rate would decrease the payment from $1,017.09 to $927.16. The homeowner would save around $90 a month, with exclusions.
Assuming refinancing costs of $2,000, this homeowner would need to stay in the home for a little less than two years to make it worth the money.

When it isn’t worth refinancing

Home buyer puts 20% down on a home worth $266,300, getting a 4% rate on the $213,040 fixed-rate loan.
Plans to move within the next two years.
Dropping to a 3.65% rate saves $42 a month, with exclusions.
With refinancing costs of $2,000, they’d need to stay closer to four years to make refinancing worth the cost.

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Article by Julia Carpenter on realtor.com