Refinancing Your Home During COVID-19

Over the last several months, we’ve been flooded with questions from our clients on a host of financial issues, from what to do about the volatile stock market to how to plan for cash flow over the next few months. One of these “hot topics” has been that of refinancing mortgage loans. Many believe that it’s the deal of the century to refinance now to take advantage of low interest rates, but we think the decision is a bit more complex and there is no one-size-fits-all answer. In this article, I’d like to share some insights, tips, and considerations on this topic; factors to consider when determining if a refinance is the right move for you.

The goal of a refinance should be to:

• Lower your monthly payments by either lowering the interest rate and/or eliminating the private mortgage insurance (PMI)
• Shorten the term of the loan
• Consolidate high interest debt into your mortgage

Before you begin the refinancing process, you should pull out your mortgage loan documents, your most recent mortgage statement and do a soft credit check. Make sure you understand the type of mortgage that you currently have. Review your loan documents or statements and gather important information such as current interest rate, loan terms, PMI, early repayment penalties or other fees that could be needed with a refinance. Loan officers can usually handle this part of the process for you, if you prefer to have a professional review your documents.

In terms of your credit score, the economic uncertainty created by COVID-19 means lenders are being more cautious and stringent about their requirements. One of the ways in which they are doing so is by raising the requirements on borrower’s credit scores. A better credit score/credit history will typically translate to better interest rates and better loan terms; it's a good idea to know of where your credit stands.

According to industry experts, prime candidates for refinancing are those who:

• Would drop at least 0.5% on their interest rate
• Are in a 30-year mortgage
• Are current on their mortgage payments
• Have a good credit score & credit history

While these are some general criteria for what a prime candidate for refinancing might look like, it also may vary depending on your specific financial situation. It’s always best to spend 15 minutes on the phone with your loan officer or bank to discuss your individual loan terms and financial situation to have them present you with some preliminary refinancing options.

2. Get Quotes & Compare Options

With a refinance, you are applying for and signing a new mortgage loan, and with a new loan comes loan origination fees. If loan origination fees are too high, they could potentially outweigh the savings that you would see from a refinance. While it might be tempting to go with the first lender’s offer, it’s a good idea to shop around and get at least three quotes to ensure you are getting the best loan package possible.

When getting quotes, make sure to ask for a Loan Estimate . This is a three-page document that lays out the loan terms in a clear and concise manner, which allows you as a borrower to compare apples to apples. Lenders are required to provide this document to you within 3 business days of submitting your loan application. One thing to note is that getting quotes with various lenders does not impact your credit score. The credit bureaus will be alerted that you are shopping for a mortgage and include all credit inquiries under one "shopping window".

Once you get your loan estimates, you will want to compare things such as: interest rates, loan terms, closing costs, monthly payments, appraisal fees, title insurance policy fees, etc. A couple of important things to keep in mind when evaluating loan estimates:

• The lowest interest rate may not always be the best option. Some lenders will offer a lower interest rate and offset that with high loan origination fees. This is why it’s so important to compare the loan estimates side by side.
• A decrease in the monthly payment may not always be a true saving because it is often a longer loan that has more future payments than the old loan. For example, if you’ve been paying your mortgage for 10 years and you refinance into a new 30-year loan, that’s an additional 10 years of payments.

3. Understand that a Refinance is a New 30-Year Mortgage

A refinance is essentially a new 30-year mortgage loan, so if you are well into paying off a 30-year mortgage, it's important to understand that a refinance will reset the clock of the loan. This is an important consideration as it could cost you more in additional interest over the lifetime of the loan. Depending on your situation, it may make more sense to work with the lender to refinance to a shorter-term loan, such as a 15-year mortgage, as these will typically have a lower interest rate than the traditional 30-year mortgages.

One of the things you should also consider before deciding to refinance is how long you intend to live in the home. For example, if you are only planning on staying in the home for 2-3 years, the costs associated with the refinance could offset the savings you would gain by refinancing to a lower interest rate, so it might not be worth it.

4. COVID-19’s Impact on Mortgage Lending

While the economic fallout of COVID-19 has resulted in record low mortgage interest rates, it has also changed the mortgage lending process significantly. It has now become more complicated to get approved for a loan, as lenders are having to be more stringent in the underwriting process to account for ongoing furloughs or unemployment that may change a borrower’s ability to pay the mortgage. Borrowers are now having to verify their employment status multiple times throughout the loan underwriting process to prove that they can pay a mortgage, so it’s important to be prepared for that.

5. Unemployment, Forbearance & Furloughs

If you have lost your job, have been furloughed, or have started the forbearance on an existing mortgage loan, this will impact your ability to get approved for a refinance. As mentioned previously, a refinance is essentially a new 30-year loan and like any new loan, you must verify your employment status and prove you can pay the mortgage. For those that become unemployed or furloughed during the underwriting process, they will have to wait until they have returned to work to proceed with the loan.

In summary, it’s not an automatic guarantee that it makes sense to refinance one’s mortgage. It’s important to consider cost savings and once the decision to refinance is made to compare the various options to ensure you are getting the best loan.

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