05 May If Rates are Rising is it Too Late to Refinance?
There’s a lot to be optimistic about in the news of late, but if you were planning to refinance your mortgage while rates were spectacularly low, you may not be feeling so hopeful. If rates are rising it is too late to refinance? While it’s true the encouraging outlook for the economy may be having a disappointing impact on interest rates, don’t give up hope yet.
Although you’ll hear about the Federal Reserve lowering or raising interest rates, they don’t actually set mortgage rates. They adjust short-term interest rates based on elements of the national economy such as inflation and job numbers. Independently, mortgage rates tend to follow because of the correlation between 10-year Treasury bonds and 30-year mortgages. Efforts to offset the ongoing COVID-19 crisis have kept rates historically low – until recently.
Are Rates Heading Upward?
Mortgage rates reached unprecedented lows in December and January – even south of 3% – but have been climbing steadily since. However, due to the Fed’s reassurances that rates will be kept low for years, and tentative steps to social and economic recovery, experts don’t expect rates to soar in 2021.
In fact, just last week Federal Reserve Chair Jerome Powell made it clear that they’re not even close to pulling back on extra-low interest rate policies. Powell indicated that there would need to be more data showing sustained and substantial improvements in the job market and economy.
The number of refinances has already begun to dip since the beginning of the year but with housing markets still strong and supplies low, home purchases remain a wise investment. That also means home equity continues to grow which makes cash-out refinances an attractive option if it fits your objectives.
Improving Your Rate
While the Federal Reserve and mortgage lenders may impact what trajectory your interest rate will go – and ultimately your monthly payment – you have some agency over improving your final rate. A lender looks at three factors when determining a borrower’s rate for refinance programs: credit, income and loan-to-value (LTV).
Although most lenders will work with a wide range of FICO scores, you can expect a lower rate the higher your number is. Be proactive and check your current rating for any errors or items that need to be updated. Make your payments on time and try to keep your balance owed at 30% or less than your credit available. Hold off on applying for anything new until after refinancing.
You may not be able to do anything about your current income, but have all your appropriate documents ready to present, including pay stubs, W2s or 1099 forms, and a list of any other financial assets.
When refinancing, lenders will determine interest rates by looking at your home’s equity and LTV. If your ratio is less than 80% you can look forward to a lower interest rate and avoid costly private mortgage insurance fees.
There are other ways to reduce your interest rate, including refinancing for a lower term, such as 15 or 20 years. If your plans are not long-term, then an adjustable-rate mortgage (ARM) might benefit you in the short term.
Is it the Right Time?
As coronavirus continues to have its way with the market, mortgage rates aren’t a sure thing – not that they’re ever 100% guaranteed. But the fact is, that the current rates are still much lower than just a few years ago, so if you didn’t refinance in the past year, you can still probably see savings that have a big impact on the life of your mortgage.
We at EnTrust Funding (ETF) encourage you to explore your options and shop around. If rates are rising is it too late to refinance? It’s never too late to take control of your financial future with the value you’ve built in your home. Give us a call today!