Although the coronavirus crisis has had a devastating impact on the U.S. economy, the pandemic has also dropped mortgage rates to all-time lows. That’s great news for homeowners looking to refinance.
The 30-year fixed-rate average plummetted to a record-low 3.13 percent the week ending June 18, according to data from mortgage giant Freddie Mac, marking its lowest recorded level since the company began tracking mortgage rates in 1971. The 5-year adjustable-rate average dropped to 3.09 percent, down from 3.48 percent a year ago.
Meanwhile, for the week ending June 12, the number of refinancing applications jumped 10 percent compared to the previous week—nearly doubling the number of applications filed during the same week last year, according to data released by the Mortgage Bankers Association. Refinance loans made up 63 percent of all mortgage applications that week.
No one knows if rates have bottomed out. They could continue to tumble. After all, the mortgage market is extremely volatile at the moment, as the nation continues to grapple with the effects of COVID-19. But one thing is clear: If you’re thinking about refinancing your home loan, now is the right time to take steps to prepare for another big drop.
It’s also a great time to explore your mortgage refinance options, which you can do in minutes by visiting Credible to compare rates and lenders.
Here are four ways to prepare for the next plunge in refinance rates.
1. Start shopping around now
Don’t wait to start getting offers from several mortgage lenders. It pays to shop around since mortgage rates can vary greatly from lender to lender. Even a small difference could shave hundreds of dollars off your monthly mortgage payments and save you tens of thousands of dollars over the term of your loan.
Moreover, getting acquainted with lenders now, and establishing relationships with loan officers, will put you in a position where you’ll be ready to pull the trigger the next time rates drop. You can visit Credible today to compare refi offers from mortgage lenders.
2. Improve your credit score
As always, the best refi rates will go to the borrowers with the best credit scores (think FICO scores of 750 or higher). So if your credit score needs improvement, use the time that you have now to raise it.
Here are a few steps you can take to improve your score:
- Eliminate outstanding debts. Carrying a balance on your credit cards? Start chipping away at it so that you’re debt-free when rates drop again.
- Check your credit report for errors. You can get a free copy of your credit report from each of the three major credit-reporting agencies (Equifax, TransUnion, and Experian) at AnnualCreditReport.com. Check for mistakes (one in four Americans in a Federal Trade Commission survey said they spotted errors on their reports). If you find a mistake, alert the credit bureau and creditor immediately to get it removed from your report.
- Increase your credit limits. Ask your credit card companies to increase your credit limits. This will improve your debt-to-credit utilization ratio, which compares how much you owe to how much you can borrow. It comprises 30 percent of your credit score, according to FICO’s scoring model.
3. Do the math
Just because refinance rates are low and could go lower doesn’t mean it makes sense for every homeowner to refinance.
Ask yourself: How much time is left on the mortgage? What would your closing costs be to refinance? How long would it take for you to break even? These are all important questions to answer before you’re forced to act quickly to lock in a low refi rate.
Need help running the numbers? Use a refinance calculator to see how long you'd have to stay in your home to start saving money.
4. Build up the equity in the home to 20 percent or more
Most mortgage lenders will require you to have at least a 20 percent equity in your home before they'll approve your refinance application. Having 20 percent or more equity also means you'll avoid paying private mortgage insurance, or PMI, on your new loan. PMI is a premium that protects the lender in case you default on your loan, and it can range from 0.55 percent to 2.25 percent of the original loan amount each year, according to a report from the Urban Institute.
The bottom line
If you’re interested in refinancing, don’t just sit back and wait for mortgage rates to drop. You’ll need to be ready to pull the trigger if you want to lock in the lowest rate possible.