Refinancing your mortgage now is a good move -- here's why
Beginning last March, the Federal Reserve took steps to protect the housing market from taking damage due to the COVID-19 pandemic. For borrowers across the U.S., 2020 was the best time to buy or refinance a home because of lower interest rates.
A downward trend continued into December where a 30-year fixed-rate mortgage was at a 2.67% interest rate. Going into 2021, mortgage rates began to rise, more noticeably after the Biden administration took office in late January 2021.
Though there are a number of reasons to refinance, saving money by lowering your monthly payment is key in reaching long-term financial goals and building your home's equity.
Applications to refinance a home have been falling. According to the Mortgage Bankers Association’s seasonally adjusted index, refinance rates are 43% lower than the same week one year ago. The refinance share of mortgage activity decreased to 64.5% of total applications from 67.5% the previous week.
Mortgage rates won’t stay this low forever. For homeowners seeking to refinance their mortgage, there’s no better time than right now, and you can start online. Visit Credible to get prequalified rates without impacting your credit score.
Mortgage refinance rates forecast for 2021
As more vaccines go into American arms and with the recent presidential transition, it has many wondering whether mortgage refinance rates will rise, fall, or remain steady for 2021.
"I believe you will see a slight rise this year in interest rates, but not a significant one," says Ralph DiBugnara, President of Home Qualified and Senior Vice President at Cardinal Financial.
DiBugnara believes inflation will have the biggest possible impact on interest rates in the future. "The federal policy to raise or lower the borrowing rate will also be essential in how interest rates look for the rest of the year," he says.
When you’re ready to compare mortgage refinance loans, Credible can be a big help. Credible lets you see prequalified rates from multiple refinance lenders, all within a few minutes.
IS MORTGAGE REFINANCING STILL WORTH PURSUING AS RATES RISE?
Why it’s still a good time to refinance your mortgage
Rates have been dropping over the past five years from 4.94% for a 30-year fixed-rate mortgage in November 2018 to 3.05% in mid-March 2021.
If you can lower your mortgage rate by one percentage point or more, homeowners are generally in a good position to refinance. Dropping by one percent — from 4.10% to 3.10% — means you’ll go from paying around $1,200 per month and $185,000 in interest to $1,068 per month and $134,000 in interest on a 30-year mortgage. That’s a savings of roughly $130 per month and over $50,000 saved in interest over the term of the loan.
If you want to see how much you could save, use an online mortgage refinance calculator to determine new monthly costs.
Whether rates go up or down, it’s believed that home prices will continue to rise. "Even if rates are a little higher now than they were at all-time lows, it will still be cheaper to buy [or refinance] now than it will in the next couple of years," says DiBugnara.
Purchasing a home might become more challenging for first-time homebuyers, as the market is becoming more competitive over the course of the coronavirus pandemic. Buyers hoping to see lower monthly mortgage payments may get some financial help from a Biden-proposed $15,000 tax credit, but factors like a closing cost and down payment should not go unnoticed.
If you think refinancing is the right move, consider using Credible. You can use Credible's free online tool to easily compare today's refinance rates from multiple lenders in as little as three minutes.
What drives mortgage rates up or down?
Whether you have a 15-year fixed-rate, 30-year fixed-rate or adjustable-rate mortgage, rates are impacted largely by factors including:
- Federal Reserve monetary policy
- Economic conditions
- Housing market conditions
- The bond market
- The borrower’s credit score and debt-to-income ratio
1. Federal Reserve monetary policy
Although the Federal Reserve cannot set specific interest rates, the Federal Funds Rate and adjusting the money supply upward or downward impacts interest rates available to borrowers.
Mortgage lenders adjust interest rates to make up for diminished purchasing power when inflation rises quickly. Lenders still need to make a profit on the loans that they originate.
3. Economic conditions
The state of the economy influences mortgage pricing. During economic growth, consumers are willing to spend more and demand for mortgages causes rates to rise. In an economic decline with a decrease in demand for home loans, the opposite takes place.
4. Housing market conditions
When housing inventory is low, a decline in home buying leads to less demand for mortgages and therefore pushing rates down. When the market is hot and there’s an increase in demand, rates tend to rise.
5. The bond market
When the economic outlook is poor, investors will turn to bonds due to less potential risk. More funds being invested in bonds means less is going into other assets like mortgage-backed securities, causing interest rates to rise.
6. The borrower’s credit score and debt-to-income ratio
Lenders need to make sure you’re capable of paying back your mortgage. To assess your risk of default, mortgage lenders look at your debt-to-income (DTI) ratio and your credit score. A high DTI and a low credit score means lenders will offer you higher mortgage interest rates.
If personal loans or student loans are not an issue and you have little-to-no credit card debt, applying for a refinancing loan could be worth exploring. But if your credit score could use an improvement and you have a high loan balance, hitting the brakes on refinancing should be considered.
4 THINGS TO KNOW BEFORE REFINANCING YOUR MORTGAGE
Refinancing can help pay off your mortgage more quickly and build the equity in your home. By saving on monthly payments, too, the burden of necessary but costly home improvements can be eased.
You can explore your mortgage refinance options in minutes by visiting Credible to compare rates and lenders and get prequalified today.
Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at email@example.com and your question might be answered by Credible in our Money Expert column.