In the past couple of months, you probably have heard about how the pandemic has led to record-low mortgage rates. As the economy suffers from lockdowns, homeowners find themselves at a position where they can refinance their mortgage and save thousands of dollars over time.
Numerous households have already taken advantage of the low mortgage rates, and more want to start the process soon. However, not everyone should do it. There are some factors that would prevent you from getting the best mortgage rates possible right now.
What is Happening in the Home Loans Market
Refinancing your mortgage basically means taking a new loan and paying off the existing one. There are a few reasons why homeowners do it but, right now, the goal is to obtain a lower interest rate that will save them money in the long run.
This year, mortgage rates have plunged significantly as a direct effect of the bad economy and the stock market’s downward spiral. In July, the mortgage rates went below 3% for the first time. The rate for a fixed 30-year mortgage was at 2.98% — the lowest it has been in nearly 50 years. The rate for a fixed 15-year mortgage was at 2.48%.
While in September, it went back up, homeowners and buyers are still enjoying lower than usual mortgage rates.
Experiencing Financial Problems? Don’t Refinance
Refinancing now can lower the total amount you have to pay over time. The mortgage data firm Black Knight said that households who would take advantage of the low mortgage rates can save an average of $290 every month or $3,500 every year.
That sounds tempting, especially for families who are hoping to save money. The pandemic has also caused a lot of adults in the United States to go into unemployment.
However, if you are already facing financial issues, refinancing your mortgage, so the amount you have to pay on a monthly basis would go down, would not be beneficial.
Refinancing Costs Money
When you refinance, you are still borrowing money. You are paying off the old loan, but you are replacing it with the new one.
When you took out your first loan, there are other fees that were included in your final bill. The same would happen when you refinance.
You would not immediately feel the difference between your old and new loans. The average closing cost of refinancing, according to Bank Rate, is $5,000. However, you can expect to pay between 2% and 5% of the principal amount.
You can lower the cost of mortgage refinancing by asking for a no-closing cost. This does not mean you will not pay closing costs at all. You will still have to cough up the money, albeit a lower amount, to make the loan official. The lender will also either raise the interest rate or fold the fee in your monthly bill. You might end up paying more if you choose this option.
Another way to lower the closing cost is by having a good credit score, something that you might not have if you are currently struggling with money.
Refinancing Requires a Steady Stream of Income
If you lost your job during the pandemic like millions of Americans, refinancing is out of the question. When you refinance, the lender will still want to see proof of adequate income which will enable you to pay the required amount on a monthly basis.
If you currently do not have a job, you are going to need to find new employment soon. And, you cannot just apply to any kind of job; for you to get a good deal, you should work in the same field.
Changing careers would not help your chances. Even if you did not get a pay cut, many lenders want to see borrowers employed in a profession for at least two years.
What’s In Your Bank Counts
Lenders would also want to look at your bank account before the mortgage is approved. They want to see that you have extra money stashed so that, if you fall on hard times, you still will be able to pay your dues on time.
The higher the loan you need, the more reserves that the lender would want to see in your bank account.
The low mortgage rates that lenders are offering right now is very tempting. Likely, if the economy recovers, you would not see similar deals in the future unless, of course, another crisis materializes. However, it is a decision that should be mulled over and over again. Consider your options, weigh the pros and cons, and shop around for the best deals.