Time to Refinance?

Is It Time to Refinance?

The Federal Reserve has just cut interest rates by .50% in response to growing concerns about the impact of the coronavirus on the economy. What does that mean for mortgage rates?

The Federal funds rate doesn’t move in lockstep with mortgage rates, particularly 30-year fixed mortgages. But mortgage rates are indeed expected to fall alongside the lowered Fed funds rate. The 30-year fixed-rate mortgage averaged 3.45% during the week of Feb. 27, and the 15-year fixed-rate mortgage dropped to 2.95%. If the yield on the 10-year Treasury continues to decline, mortgage rates could drop more as well.

As you know, the Federal Reserve does not set mortgage rates or any interest rate for that matter. The Federal Funds rate is a suggestion of what banks should charge each other to borrow money overnight so that banks can meet their reserve requirements. It is the shortest of available short-term rates.

The math

To see if it makes sense, you need to look at more than just the difference between the rate you have now and the new rate offered.

Important determinants are:

  • how long you plan to be in your home and
  • the cost of the refinance
  • the length of the mortgage

So the first step is to look at the difference, or spread, between your current rate and the rate in the market. Then think about how long you’ll be in the home – if it is only a few years, it might not be worth it. Then look at costs, because a refinancing means paying significant closing costs that can often amount to a few thousand dollars. Then think about how long you want the mortgage to be – for example, if you have $100,000 left with 9 years to go, you might not want to lock in to a 30-year fixed mortgage, regardless of rate. Extending the term even with a lowered rate may end up costing you more in interest over the long run.

Cost of refinance

Costs involved in a refinance include appraisal fees, transfer taxes, origination fees, attorney fees, title insurance, flood certification fees, and recording fees, and lawyer’s fees.

We know that rates have fallen before, so those who wait to refinance could potentially see even better ones ahead. As the coronavirus continues to develop and its effects are felt around the globe, the mortgage market could see even more changes.

Shop around. That’s one of the most important tasks. Lenders will often reserve their best rate until you come back with a better one from a competitor. Get offers in writing for this reason.

The lower the interest rate is, the more palatable it is to pay for closing costs, so if you are saving $500 a month, you might find that the fees are made up in a few years.

If the potential saving from a lower-rate mortgage doesn’t make up for those costs, it may not make sense to refinance just yet.

What is required

There is pain in the refinancing process – similar to getting all your documents together to update your financial plan. The mortgage lender will want to see your latest mortgage and bank statements, a copy of property appraisal report from the appraiser, proof of income (including the previous year’s W-2 and federal tax return, as well as your most recent pay stub and any documentation on additional earnings), a list of your debts, and an inventory of your assets.

And after getting all that to the lender, they may come back and ask for even more documents and data. The whole thing can take several weeks.

Refinancing can be worth the time and effort – but each case is different. Give us a call for help if you want to figure out whether a refi is right for you.

Blue Spark Capital Advisors

We're a fee-only Registered Investment Advisory and financial planning firm based in New York City and the Berkshires.

We specialize in working with women after divorce, death of a spouse, or other life transitions such as retirement or job change. We provide financial planning and investment management services.

We believe in a holistic approach. Movement in each piece of your financial plan impacts the others, so we consider your entire picture.

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New York, N.Y. 10011
(212) 537-3899

93 Church Street
Lenox, Mass. 01240
(413) 551-7000

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