Should you refinance your mortgage during the COVID-19 crisis?

With interest rates at record lows, this may be an opportunity for homeowners to save big by refinancing their mortgages.

While much of the US economy is suffering during the COVID-19 pandemic, the real estate market is currently buzzing with energy. The buyers and homeowners are rushing to take out new mortgages and refinance existing ones as interest rates remain historically low.

“I feel like I’m selling war bonds,” he says. Julee Felsman , senior vice president of mortgage lending at Guaranteed Rate in Portland, Oregon. “It was her patriotic effort in the 1940s to buy war bonds. A lot of economic activity happens around the home, so giving it some juice will help with recovery from the negative impacts of COVID.”

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It may be a stretch to call refinancing right now a “patriotic duty,” but it can still be a good idea for a variety of reasons.

How has COVID-19 affected the housing market?

The main impact of the pandemic on the housing market has been to drive activity to almost manic levels after the Federal Reserve cut interest rates.

“Contrary to what many analysts expected at the beginning of the year, the real estate market has held up reasonably well during the first few months of the pandemic,” says Andrew Schrage, co-founder and CEO of Money Crashers . “That’s due to a variety of factors, two of the biggest being generally low interest rates and readily available credit to well-qualified borrowers.”

The combination has caused a burst of energy in the sector that is one of the few bright spots in our sorry economic situation.

“As an industry, we operate at two to three times normal lending capacity,” says Felsman. “For the first few months, we were working on adrenaline and treating it like a sprint, but it turned into a marathon. We have to give priority to people who buy houses and, in addition, we have to juggle to attract the more people.” refinance as we can . We are absolutely at the maximum, beyond the maximum.

Despite this pressure cooker environment, potential refinancers should not hesitate to participate .

Should you refinance?

Low interest rates provide a strong incentive to refinance now. The rates are so low, in fact, that many mortgage borrowers would benefit.

“While every homeowner’s situation is different and refinancing is certainly not a decision to be taken lightly, now is a very good time for most homeowners to consider taking this step with mortgage rates approaching record lows,” says Schrage. “Given the dollar amounts at stake, even for modest-value homeowners, refinancing is one of the most reliable and impactful ways to take advantage of low interest rates.”

That said, Felsman emphasizes that borrowers should get clarity about your goals before looking to refinance. She offers her clients a list of questions in response to inquiries about whether they should refinance, including:

  • Looking for a lower payment?
  • Looking for a shorter loan term?
  • How long do you want to keep the loan?
  • How much can you pay monthly?
  • Do you want any refund?
  • What are your credit scores?
  • What is the estimated market value of your home?

These questions are necessary because a cost-benefit analysis is included with every refinance. For example, if a borrower only has a few more years on their mortgage, it would be difficult for any amount of interest rate reduction to offset the fees they would spend on refinancing.

“The longer you anticipate keeping your loan, the more likely it makes sense,” says Felsman. “I’ve talked to people that I can save more than 2% but it’s not worth it. And I’ve talked to others that I can only save 0.5% and it will pay for itself in 18 months.”

Challenges in times of COVID-19

A challenging factor during the pandemic is that borrowers must be in stable, gainful employment to qualify for a new loan. Many no longer have that.

Those who qualify may find that lending guidelines have become more restrictive. Lenders must consider default risk, which is difficult when we face so many unknowns.

The process is also taking longer than before. While a refinance typically takes 30 to 45 days, Felsman sees them at an average of 60 to 90 days right now. Lenders that are overwhelmed with applications and looking to speed up their volume may decide to charge more by raising interest rates.

Despite all these challenges, many homeowners qualify for refinancing and are eagerly seeking it for low rates. They know they need to act fast, as the opportunity can disappear as suddenly as it appeared.