Homeowners have been hearing about “historically low” interest rates for the better part of the last decade. But rates that have dropped even lower in the wake of the pandemic has sparked a surge in mortgage refinancing activity with rates that are now at new record low levels.
The incredibly low rates have created a favorable climate for both taking out a new loan on the purchase of a new home and refinance an existing mortgage. In fact, single-family mortgage originations are forecast to jump by 30% this year to reach $3.0 trillion, according to a Fannie Mae Housing Forecast published in June.
For many homeowners, it is an ideal time to refinance an existing mortgage at a lower rate and cash in on significant savings over the term of the loan. According to Fannie Mae, refinances are expected to account for 59% of total mortgage origination volume – $1.8 trillion as compared to the $1 trillion that occurred in 2019.
So just how low are mortgage rates? Rates vary based on a variety of factors, such as an individual or married couple’s credit profile, loan amount and the length of loan, which typically include 15-year, 20-year or 30-year options. According to Fannie Mae, the annual average rate for 2020 will be 3.2%, which is down from the average of 3.9% in 2019. The 3.2% also breaks the record low of 3.65% set in 2016. The current interest rates on their own provide an attractive financial incentive to refinance. At the same time, homeowners also can realize additional benefits from refinancing that include:
- Pulling equity out of the home, and using that cash to consolidate debt, make home improvements or purchase a new property.
- Changing the term of the loan, such as switching from a 30-year to a 15-year term.
- Changing the loan structure from a floating rate to a fixed rate.
- Creating an opportunity to lower your monthly loan payment.
It is important for homeowners to weigh the benefits or savings to be gained in refinancing versus the costs involved in taking out a new loan. One general rule of thumb for a sufficient refinance incentive is the ability to reduce the mortgage rate by at least 0.75%. In addition, homeowners also should consider other factors, such as how long they plan to stay in the current home. For instance, the cost of refinancing usually doesn’t make financial sense if you plan to sell your home in less than three or four years.
What to know before you refinance:
- Even though you already have a mortgage, you are still required to fill out a mortgage application, which includes routine steps such as filling out an application and going thorough check of credit, income, finances and employment, as well as completing a new appraisal to confirm the value of the home.
- There is a cost. Refinancing does involve various fees and closing costs that vary depending on the loan amount and individual lender.
- There is no universal or standard mortgage rate. Rates are slightly different based on the lender and state, as well as the credit of the borrower and size of the loan. So, it is important to look at the rates for the state where you own property and also get a quote or quotes from a trusted mortgage provider.
- Will I get a lower rate if I wait? Maybe. Fannie Mae is predicting that the 30-year mortgage rate could drop to a new record low of 2.9% in 2021. However, predicting interest rate moves is extremely challenging, and some might even say impossible given the unforeseen circumstances that can and do arise. So, choosing whether to take advantage of the current low rates, or waiting to see if rates will drop further, will depend on your appetite for risk – and the clarity of your crystal ball.
Homes and vacation homes often represent a major investment for most people. As with any investment, it is important to work with a trusted advisor and conduct careful due diligence. In particular, make sure to look at all of the financial details to determine if refinancing makes financial sense for your unique situation. For some borrowers, it is worthwhile to lower the monthly payments now and have more cash in their pocket each month, even if it means paying more over the life of the loan. For others, it may be more beneficial to shorter the term of the loan and pay more each month if it means lowering the total amount paid over the term of the loan.
About CanAm Capital Partners
CanAm Capital Partners, LLC (“CACP”) is a New York-based private equity investor, manager and advisor with a primary focus on real estate principal investment. CACP is an affiliate of CanAm Enterprises, the largest EB-5 lender in the United States. CACP and its affiliates have been involved as a principal or lender in transactions with an aggregate transaction value in excess of $3 billion in multiple markets across the U.S. For more information, please visit www.canamcapital.com/cacp.