After the Federal Reserve’s decision in late July to lower interest rates, there was an immediate and dramatic impact on the mortgage market as many families moved to take advantage of the new rates.
In the week following the rate cut, new mortgage applications skyrocketed as many families decided that now was the time to buy and to take advantage of the opportunity offered by lower rates. Volume rose 5.3%, according to the Mortgage Bankers Association’s seasonally adjusted index — 46.5% higher than a year ago, when rates were significantly higher.
But the lower rates really drove current homeowners to refinance their current mortgage loan. These applications rose 12 percent for the week and a stunning 116 percent from one year ago. The average contract interest rate for 30-year fixed-rate mortgages with loan balances of $484,350 or less dropped to 4.01% from 4.08% – the lowest level in nearly three years. If rates continue to drop, the number refinance applications should continue to rise.
Should I Refinance?
Refinancing a mortgage means paying off an existing loan and replacing it with a new one. There are many reasons why homeowners refinance: to obtain a lower interest rate; to shorten the term of their mortgage; to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa; to tap into home equity to finance a large purchase, or to consolidate debt.
But there are upfront costs for any refinancing. As with an original mortgage, it requires an appraisal, title search, and application fees. So, while the long-term impact of lower rates usually outweighs these costs, any homeowner needs to determine whether refinancing is a wise financial decision.
Refinancing Has Big Benefits
One of the best reasons to refinance is to lower the interest rate on your existing loan. Historically, the rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2%. However, many lenders say 1% savings is enough of an incentive to refinance.
Lower rates also give some homeowners the opportunity to move from a 30-year to a 15-year mortgage loan. This is a smart money move for most people as the monthly payment won’t increase by much, but you will have paid off your house much more quickly – and save tens of thousands of dollars.
Other Benefits of Refinancing include:
- Switching to a fixed-rate mortgage—or to an adjustable-rate one—can make sense depending on the rates and how long you plan to remain in your current home.
- If you owned your home for a few years and built equity, it can be used to pay off or consolidate credit and other debt. But be careful with this option – you’ll need financial discipline to be sure that you don’t squander your hard-earned equity on temporary pleasures.
Is It a Good Time to Buy a Home?
With the US-China trade war lingering and global growth slowing, the Federal Reserve may continue to cut interest rates later this year. If so, mortgage rates may continue to drop and it may be the right time to make a home purchase. If you are seeking to purchase your first home, it may be difficult to find an affordable home that meets all of your needs. Consider taking the following steps to get the best loan possible.
Find Out About Down Payment Assistance Programs
Many local and state governments, as well as most major lenders, offer programs to help people purchase their first home. In addition, down payment assistance grants provide homebuyers with down payment and/or closing cost funds that don’t have to be repaid.
Down Payment Resources is a great tool that let’s you know about programs in your area. Examples of other nationally available down payment grant programs include the nonprofit National Homebuyers Fund, which gifts homebuyers with up to 5 percent of the loan amount, and the Dream Makers Military Heroes Fund from the PenFed Foundation, which offers up to $5,000 in down payment grant money to qualified military members.
Plenty of lenders also provide help. Since 2012, Wells Fargo has provided more down payment assistance grants for homebuyers than any other bank in the U.S. through its philanthropic NeighborhoodLIFT® and other LIFT programs in collaboration with NeighborWorks® America. Nearly 22,000 families, the majority of which represent low- and moderate-income households, have achieved sustainable homeownership through LIFT programs, with Wells Fargo investing more than $475 million for down-payment assistance grants and homebuyer support.
Seek Free Advice from a Nonprofit Housing Counselor
HUD-approved nonprofit housing counseling organizations – such as credit.org and Money Management International — offer prepurchase counseling and online education courses to help first-time homebuyers understand the home buying process. These organizations have plenty of dedicated counselors that can help anyone prepare for homeownership.
A counselor can help a prospective homeowner understand how much money they need for a down payment, prepare a budget to cover their living expenses and realize they will need money to maintain their new home. To find a HUD-approved counseling agency in your state, go here: https://apps.hud.gov/offices/hsg/sfh/hcc/hcs.cfm
Check Out This App
For the technology-savvy individual, HLP.Guru can quickly help anyone looking to buy a home. The app will analyze a person’s credit history and provide them with a forecast of their future credit score if they pay down debt or take other actions to bolster their finances.
The app also has a simulator to test different financial decisions to see how each may impact your financial health. Finally, a prospective homeowner has access to a "guru." These are nonprofit housing counselors that can help build a financial plan to buy and keep your home. To find out more, go to https://hlp.guru/
Mark Cole is Chief Executive Officer of HLP, a nonprofit mortgage technology company based in Baltimore. HLP’s web portal is a one-stop technology solution to help homeowners nationwide ensure that critical documents from distressed homeowners reach mortgage companies. To find out more about HLP’s services, visit www.hlp.org.