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Super-Low Mortgage Rates Mean A Great Time To Refinance

Interest rates are at historic lows but home values are stable, creating a rare opportunity to refinance mortgages.

Although the economy is hurting, in many crises there are hidden bright spots. While many businesses are operating on life support, certain sectors of the economy are being boosted by the current economic situation. One of these is the mortgage industry.

The mortgage industry is benefitting from very low-interest rates, which help to fuel demand for new loans. CNBC reports that the average interest rate for a 30-year fixed-rate loan has declined to 3.30 percent. The Federal Reserve cut interest rates to zero in mid-March in an effort to help boost the economy.

As a result of the dropping rates, mortgage applications are up 21 percent over last year. Almost two-thirds of the new loan applications are for refinances of existing loans rather than new purchases. Since many Americans have been laid off, furloughed, or have otherwise lost income due to the Coronavirus pandemic, a mortgage refinance is an alternative way to improve cash flow.

The growing popularity of refinances does not mean that the real estate sales market is tanking, however. So far, residential real estate prices 9have weathered the storm even as house listings have increased per MarketWatch. The reason is that surging demand has propped up real estate values.

HousingWire reported that seasonally adjusted demand for houses was 25 percent above pre-pandemic levels. High demand has led to bidding wars and nearly half of new listings are sold within 14 days.

The pandemic may have lasting effects on the real estate market, however. After a firsthand look at the risks of contagion within urban areas, homebuyers seem to be trending toward rural and suburban homes. City homes are currently spending more time on the market before a sale than their country cousins.

I was one of the many Americans to take advantage of low interest rates to refinance our mortgage over the past few months. Even though we had only been in our home for about two years, we took advantage of the low rates. This was made possible by the fact that home values had not declined as the economy faltered.

If you are thinking about refinancing your mortgage, there are a few factors to consider. If you have a high interest rate or an adjustable rate mortgage (ARM) and you also have good credit and stable income, this could be a great time to save money with a refinance. As a rule of thumb, if you can save more than one point on your interest rate and plan to stay in your home five years or longer, you could benefit from a refinance.

In our case, we got a new interest rate that is 1.5 points lower than our old one. The new, lower payment will offset the closing costs of the loan in about two years.

If you need extra money and have equity in your house, you can also use a refinance to pay off other debts or get cash out. I would recommend proceeding cautiously with these options, however, since you lose equity and may put your home at greater risk if you lose your job. Less equity also means that your home may be more difficult to sell, especially if home values start to decline.

If you’re interested in a refinance but need to clean up your credit or build more of a work history, you may not have to hurry. Interest rates are currently at record lows, but they may not return to normal for a while. Most members of the Fed say that they don’t plan on raising rates until 2023.

If you would like to continue the discussion on social media, you can visit David Thornton’s Facebook page or follow him on Twitter.


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