With the real estate market in a constant rollercoaster due to the coronavirus, homeowners are watching interest rates like hawks. If they drop low enough, you could score a great deal on refinancing your home.
Before you jump to refinance, see if now is the best time to take advantage of rates and if it’s worth going through the process during a pandemic.
1. Refinancing demand is high
When I bought my home last month, there was a delay with my mortgage broker. Nothing we did wrong, he said. But the brokerage got such an influx of refinancing applications that it pushed back my closing paperwork. We got everything done at the final hour, but under normal circumstances, it would’ve happened weeks sooner. With so many people requesting refinancing, our application stalled.
Melissa Cohn, executive vice president of sales at Family First Funding, says demand was strong in March when rates were at historic lows, forcing brokerages and banks to reduce their pool of applicants with new guidelines.
“As a result of the massive demand last month and the impact of COVID-19, banks have raised rates, tightened guidelines and eliminated some lending programs leaving a large number of refinancers in the cold,” Cohn says. For the week ending in March 6, mortgage applications were up 55.4% over the previous week. Of those, 76.5% of those applications were for refinancing, according to the Mortgage Bankers Association. It’s the highest refinancing has been at since April 2009.
2. It could take longer to get approved
You’re not the only one who saw interest rates drop. If you’re shopping around for the best refinancing deal while rates are low, keep in mind that there’s an influx of other homeowners who are doing the same thing. While the coronavirus outbreak might’ve triggered an interest rate drop, it’s not doing you any favors.
“Lenders are working through their huge pipelines,” Cohn says. “With many lenders working from home, it’s taking much longer to get loans approved, get appraisals complete when needed and to get the loans closed.”
Cohn says some lenders have stopped taking new applications until they work through what they have on hand. If you applied, you might still get approved, but it could take much longer than normal. If you try different brokers and lenders, compare requirements and qualifications to see if you’re eligible.
3. Rates are fluctuating, requirements are stringent
March and April are both seeing rates hit record lows. The week of March 6 saw rates on 30-year fixed-rate mortgages drop as low as 3.47% -- its lowest since December 2012. The week ending on April 17 saw it as low as 3.45%. Richard Barenblatt, mortgage banker at GuardHill Financial Corp., says some lenders are raising rates and requirements to slow down the flood of refinancing inquiries.
“Lenders have raised credit score [requirements], reduced loan-to-values and require more post-closing liquidity,” Barenblatt says. “Borrowers employed in industries that have been heavily impacted by the coronavirus pandemic will have greater scrutiny to ensure they have the ability to repay their loan.”
If you were planning to take advantage of the low rate, but have since been laid off or had your hours reduced, you may have more trouble getting your refinancing application approved. Lenders, who aretaking very conservative stances during the outbreak and economic crisis, are wary of taking on loans for homeowners who are at risk of missing loan payments.
4. Some loans aren’t available at all
If you’re on the hunt for a specific type of loan, there are some you might not get.
“Many lenders have eliminated or restricted cash-out refinances, financing for investment properties and some for second homes as well,” Cohn says. “Jumbo lenders have also tightened guidelines.”
Jumbo loans are loans that are too expensive for conventional loan coverage and therefore are not backed by Fannie Mae and Freddie Mac. They vary by the state (and sometimes county) since some housing markets are higher-priced than others. For example, in San Francisco, a mortgage loan becomes a jumbo loan when it exceeds $765,600. In many parts of the US, jumbo loans start at $510,400. Due to the uncertain economy, lenders are hesitant to grant jumbo loans that are not protected if a borrower defaults on their loan.
Barenblatt says along with the rise in borrower requirements for the most common loan types, you might struggle to get a nonqualified mortgage.
“Nonqualified mortgages, aka Non-QM loans, have mostly disappeared,” he says. “These programs cater to self-employed borrowers whose taxable income would not qualify for a conventional loan.” If you’re in an unusual borrowing situation -- you own your own business, or you’re seeking a risky type of loan -- refinancing will pose extra challenges right now.
5. Refinancing is still a good idea
Cohn says that if you have a conforming loan (not a jumbo loan) with good credit and you’re still earning money, there are still good rates available.
“[A] 30-year fixed [rate mortgage is] near 3%! So if your rate is 4% or higher now is the time to refinance,” she says. “If you need to take cash out of your home then now is definitely the time to refinance before values drop and lenders further restrict how much cash out you can get.”
Cohn also expects interest rates to drop again, if not even more so.
“We are in or heading into a serious recession,” she says. “Rates will go lower and will remain low for months to come.”
Barenblatt envisions much of the same. Look out for more low rates with a spike later on.
“I expect rates will stay low for the next 12 to 18 months thanks to the Federal Reserve stepping in to stabilize the economy,” he says. “However, once the stimulus ends, rates will most certainly go up.”
Even though the process may be more arduous than usual, qualified borrowers should still pursue refinancing to take advantage of current (and potentially forthcoming) low rates.
6. But you’ll need to manage your finances carefully before applying
Before you pursue refinancing your home loan, make sure you know what you need to do to qualify.
“Lenders will look carefully at borrowers who have recently changed jobs,” Barenblatt says. “Don’t apply for new credit prior to refinancing since credit inquiries may bring down your score. Don’t max out your credit cards as that too is detrimental to a credit score. At a time when unemployment is rising at an alarming rate, lenders will want to see a larger liquidity cushion post closing.”
