While 2020 will be remembered in the history books as the year of the pandemic, those within the mortgage lending world will also remember it as the year of booming refinance activity.
And 2021 is already looking to be just as busy.
With interest rates for 30- and 15-year fixed mortgages still hovering near historic lows — 2.8% for 30-year fixed mortgages, as of early January — more and more home owners are looking at refinancing, primarily as a means of lowering their monthly payments or shaving years off their mortgage term.
The Market Composite Index, which tracks mortgage loan application volume, showed the Refinance Index to be 93% higher in the first week of 2021 compared to the same period in 2020. Overall, the refinance share of mortgage activity made up for just under 75% of all applications, the index found.
“Booming refinance activity in the first full week of 2021 caused mortgage applications to surge to their highest level since March 2020,” said Joel Kan, associate vice president of economic and industry forecasting with the Mortgage Bankers Association, which published the index.
But although we’ve seen low interest rates before, the current moment marks an unprecedented combination of a “red hot” housing market and “an equally red hot” refinance market, according to Randy Shamburger, a Greenville-based senior mortgage loan officer with Movement Mortgage.
“Those two don’t normally overlap very much at all,” Shamburger said. “It’s the first time in history, or at least the 22 years I’ve been in business, that we’ve seen anything like it.”
Typically, low interest rates occur when the economy is struggling, which is almost always an indicator of how the real estate market is doing. In other words, if the real estate market is struggling, interest rates go down.
“But this is different because of what caused the rates to go down, which was a rapid, medically induced event rather than a slower progression like what we would normally see,” Shamburger said. “My point is, just about anyone who owns a house that has a 30-year mortgage can save money and save interest costs by looking at refinancing.”
That advice comes with one small caveat, according to Jay McDonald of Prime Lending, who said anything with a 30-year fixed mortgage with an interest rate of 3.75% or higher should definitely refinance — although that amounts to the majority of all 30-year fixed mortgages.
McDonald said timing is important too, as those planing to stay in their home for five years or more will see the most benefit from refinancing.
While both McDonald and Shamburger argue that not many people with a 15-year fixed mortgage will be able to see significant savings, they said those with 30-year mortgages — even those who are well along into their mortgage term — should look into refinancing as an option.
“You can reduce interest costs, maybe knock a few years off, or sometimes just being able to take out a little cash while keeping the payment the same,” he said. “That could pay off a car, say, or a year of college.”
First things first, you need to know what your goal is.
Most common goal for a refinance: Lowering the monthly payment.
Other options include:
- Reducing the term, but keeping the payment the same
- Reducing the term a lot, while increasing payment
- Removing PMI, or private mortgage insurance, and getting some cash out while keeping the payment the same
Next, you need to know the value of your home. You can base your estimate on: recent neighborhood sales, a realtor estimate, a personal opinion or by scrolling through Zillow.
Finally, you need an estimated time for how long you plan to live in the home. That can be broken down into three categories:
- 1-3 years
- 4-7 years
- 8+ years
When picking a mortgage lender for a refinance option, you’ll need to bring a copy of your current mortgage statement. The lender should be able to offer a general rate range right away based on verbal information.
How much will it cost you?
There are two main cost categories: fixed costs and recurring costs.
Fixed costs include a home appraisal, a credit report, an underwriting fee, attorney fee and title insurance.
Recurring costs are paid at the closing and every month thereafter. They include taxes, homeowner’s insurance and mortgage insurance.
All in all, average total costs amount to $2,500 to $3,000 in the Greenville market for a home refinance.