Finance forecasts are reporting a possible increase in the national interest rate. This is due to the expected economic recovery and the distribution of COVID-19 vaccines.
But it is still too early to know how high the rates would get. People are advised to refinance only if they’re sure to have financial stability in the coming months.
With all the things that happened in 2020, almost everyone has been affected financially and economically. People lost their jobs, businesses paused their operations, and people tend to stay at home and live with their savings (if there’s any.)
If there’s something positive that is worth mentioning, that would be reduced interest rates.
And, unsurprisingly, people who have mortgages and other debts had capitalized to pay less on their obligations. Last year was, ironically, one of the best times to pay any debts, especially the long-year ones. People who missed this opportunity are now looking for 2021 to get another chance.
“Is it too late to refinance the mortgage or is there still time to reap the benefits?”
Let’s discuss this year’s possible interest rates and how COVID-19 will affect any movement.
What Is Mortgage Refinancing
Certainly, a mortgage is a long-term debt. But there are several ways to lower your monthly payments and shorten the term of your debt. With the right time and the right opportunity, mortgage refinancing can do both.
Mortgage Refinancing – Defined
In layman’s terms, mortgage refinancing is when you pay off a current loan by getting another loan. Your previous loan is completely written off, and you’re going to start paying your new one.
Most homeowners usually get this option if they want to cash out a portion of their equity or if they want to change the loan terms.
After a successful refinance, the debtor will have new interest rates, monthly payments, and payment schedules. Getting a loan to pay off a loan might seem redundant.
But it will all make sense when the interest rates fall. If you get a loan during a time of low-interest rates, your will pay less. People also seek to refinance their mortgages to shorten their loan terms.
For example, an $80,000 mortgage with a 5% interest rate will yield a $548 monthly payment for 30 years. If the interest rate falls to 3%, and you successfully qualified for a fixed-rate mortgage refinance offer, you can reduce your loan tern to 20 years with a $562 monthly payment. Yes, the monthly payment adds about $14, but you shelved ten years on your loan.
Does Refinancing Make Sense?
Mortgage refinancing does make sense when the interest rate is low. It saves you tons of payment costs in the future while reaping the benefits of not paying rent. This is a good option if you’re planning to stay in the house for a long time.
Another reason why refinancing can be a good option is the chance of changing the loan type. Suppose you have an adjustable-rate mortgage, your interest payment changes based on the current national interest rate. Changing your loan to a fixed-rate loan when the rate is low will give you savings for the rest of your loan’s life.
Do take note that different loans have different terms and rates. Your loan might or might not benefit from refinancing. Even if the rate is low, this might not help you if your income sources decrease. To check if a refinance will benefit you, you can use mortgage calculators and tools offered online, like Bankrate’s calculator.
Closing Costs and the Adverse Market Fee
If you decided to get a refinance, don’t forget to include the Closing Costs and Adverse Market Fee. Both of these additional expenses are paid when a successful mortgage refinance is achieved. If these costs are too high, it might end up affecting your ability to pay and derail your financial plans.
The Closing Costs
According to Investopedia, closing costs are expenses incurred when transferring property from the seller to the buyer.
Since you’re liquidating your initial mortgage to get a new one, it means that you completed it and had made the full payment. This cost is usually about 2 percent to 5 percent of the total amount of the loan.
The average refinancing closing cost in the US is quite high, about $5,779, according to a fintech company called ClosingCorp. If you can’t pay the amount for closing costs, you might want to reconsider your refinancing plans.
The “Adverse Market” Fee
Another fee to be wary about is the Adverse Market fee. This is an additional charge from the Federal Housing Finance Agency or FHFA, which affects Fannie Mae and Freddie Mac’s loans. Almost 70% of refinances sold to these organizations will have an additional 0.50% fee. Even if the interest rates are historically low, the cost of these fees upfront can dent your finances.
Mortgage Interest Rate Predictions for 2021
Time Magazine interviewed five finance experts, and most forecasts expect an increase in interest rate. However, all experts agree that there would only be a small increase.
Logan Mohtashami from HousingWire expects that the interest rates will not go above 4%. He also added that the increase or decrease of rates would depend on the effectiveness of COVID-19 vaccines.
Effects of COVID-19 Vaccines
Last year, what prompted the interest rate decrease was the spread of COVID-19 worldwide. It caused numerous establishments to slow down or completely shut operations.
Unsurprisingly and understandably, the economy plummeted causing low levels of economic activities. In the US alone, there are nearly 100,000 establishments that are temporarily closed.
Interest rates are lowered down to encourage economic activities during the pandemic. Hence, people started filling up refinancing forms. Lenders became busy due to applicants. However, as pandemic effects slow down, the interest rates may increase once again. And the most significant determinant of this is the COVID-19 vaccines.
As citizens’ daily lives start to go back to normal, businesses will begin to operate, and people will be doing life as usual before the pandemic. And the vaccines will play a big role in this happening.
Another factor that needs to get addressed is inflation. This is expected in a handful of sectors, especially those whose products are services were paralyzed due to the pandemic. With the demand for these goods expected to increase, so as the prices, causing inflation. And inflation can increase the overall interest rates because lenders will try to avoid losses.
Also, unemployed people will likely start to find jobs when most businesses resume operation. The increase in income and the aid from the government will likely aid in the rise of inflation. Overall, as the economy gets back to normal, more refinancing becomes a bad idea.
Interest Rate Increase During the Latter Half of the Year
Since the vaccines are only starting to get distributed worldwide, it is still uncertain if the rate will go up or go down. If the vaccines work, there’s a high chance that the interest rate will swiftly increase after rollout. And this will most likely happen during the last months of 2021.
Interest rates are still quite low, so even if it increases gradually this year, there can still be a benefit in refinancing mortgages. If you missed the refinancing train last year, it is more likely that you will not get it again this year.
The mortgage rate now is below 3% in most loans. But this average can easily approach 3.4% by the end of the year, according to Danielle Hale from Realtor.com.
Is Refinancing in 2021 Still Worth It?
Refinancing when the rate is low can give you tons of benefits. But since most of the forecasts deem an increase in interest rates this year, you might want to stop and assess the situation first. A general rule of mortgage refinancing is only to apply based on your case.
Take note: even if the rates are low, it will not help you when you don’t have financial stability. Also, consider the cost of refinancing (the closing cost and adverse market fee), which is a decent amount of money.
Bankrate advises people only to refinance if all of the following criteria match their financial condition:
- If the refinance will give you a lower monthly rate or payment
- If it can reduce your loan term
- If it improves the effect of debt consolidation
- If you need a cash-out to refinance
When deciding to go with your refinancing plans, make sure to shop around and check the lender’s offers. Weigh in final costs and the savings you can get from getting a refinance. Only apply if there is a significant benefit of doing so.