Is it still a good time to refinance your home?
When a world-shattering event such as the COVID-19 public health crisis shakes the global economy, there are unpredictable consequences. Supply chains continue to be strained, leading to empty shelves and car dealerships. The government’s generous pandemic aid has worsened inflation, pushing it to levels not seen since Stephen Spielberg’s “Raiders of the Lost Ark” was the highest-grossing film of the year. Russia’s war against Ukraine has not only triggered untold human suffering, but has also driven up fuel prices. So, while many have rushed to take advantage of historically low interest rates and rising home equity, is it still a good time to refinance your home under current economic conditions?
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Indeed, the U.S. Bureau of Labor Statistics says in an April 12, 2022 Consumer Price Index release that the gasoline index rose 18.3% throughout the month of March, while inflation rose across the board. “The all-items index continued to accelerate, rising 8.5% for the 12 months ending March, the largest 12-month increase since the period ending December 1981,” the report said.
Inflation, once considered transitory, has not come down as hoped. To curb soaring prices, the Federal Reserve approved a 25 basis point interest rate hike at its March meeting. Then, during an International Monetary Fund panel on April 21, 2022, Jerome Powell, Chairman of the Federal Reserve, indicated that a more aggressive approach might be needed. “I would say 50 basis points will be on the table for the May meeting,” he says.
Higher interest rates mean borrowers end up paying more on a loan than they otherwise would have. Although rate hikes have repercussions throughout the economy, one of the main sectors they affect is the mortgage sector, where most Americans borrow money for one of the most important purchases. most important in their lives.
Nevertheless, the current federal funds rate of 0.33% is lower than the rate of 1.58% in February 2020, just before the pandemic began its march across the United States and the Fed cut rates. in response. That said, is it still a good time to refinance a mortgage, and how do these changes affect the booming real estate market?
A strange asymmetry appeared in the early days of the spread of the coronavirus. Businesses that rely on crowds, such as concert halls and cinemas, have found themselves in dire straits, while online services such as Zoom and Amazon have exploded. A combination of basement-level interest rates, the proliferation of remote work, and the desire to avoid dense cities has led to a frothy mortgage market.
Aaron VanTrojen, CEO of Geneva Financial, says the health of the sector was uncertain at the start of the public health crisis.
“When the pandemic hit in March 2020, it nearly bankrupted the entire mortgage industry,” he recalls. “After the federal government passed the CARES Act, it essentially made mortgages worthless for investors. And so overnight, something that was very profitable, was not profitable. In fact, it costs money to finance loans. It nearly wiped out the mortgage industry.
“Fortunately, the federal government realized its mistakes and fixed the CARES Act,” continues VanTrojen. “That made it probably the two most profitable years in mortgage history. Every homeowner had the ability to refinance at lower rates, home prices jumped, and buyers flooded the market. So, not only have we had a huge increase in refinancing activity, but we’ve also had a huge increase in purchase activity.
Responding to this request was as difficult as it was unexpected. Greg Thorell, senior vice president of residential loans for Arizona Federal Credit Union, says he had enough staff to handle 200 loans at the start of the pandemic.
“At one point, I had 450 [loans to service],” he says. “Hiring staff in those days was extremely difficult. You would basically have to pay hiring bonuses and overpay in some ways. I’ve never been a manager who over-hired and then had to downsize. So we sucked it for about a year, and it was pretty tough because we had so much volume.
As with any expansion, the rhythm inevitably loses momentum before there is a contraction. For the mortgage boom, Lisa Davey, vice president and head of the northeast Arizona retail division at WaFd Bank, says the high point was reached somewhere between the summer of 2020 and the summer 2021.
“It’s been a great two years for the bank, and it hasn’t slowed down much. When rates were as low as they have been, everyone and their mothers refinanced at least once, if not twice. Many people have done home improvement projects over the past two years, and that has been a driving force as well,” she notes. “The refinance market is slowing down a bit as we see a massive influx of construction loans. This seems to be all the loan requests we receive. »
The clock is turning
As interest rates begin to rise, procrastinators and Johnny-come-lately-types might see a window of opportunity to save money close each month. Is it too late to refinance?
“I’m going to stop before I say someone missed the mark,” says Ken Bauer, director of loans at OneAZ Credit Union. “If you take the rates right now and put them in historical context, they’re still really, really low. If you look at those rates over the last two or three years, they’ve gone up a bit, but they’re still not bad. I can’t imagine we’re going to see rates again like we did November and December 2020.”
Regardless of a homeowner’s current rate and how long they stay in their home, that also affects the math, but Bauer thinks many borrowers can still benefit from refinancing. “There are still a lot of people who have sat a little too long. And of course they missed the lowest low, but they still have to think about it,” he says. “Generally, if you can save half a percent off your rate, you should refinance — there’s just no reason not to.”
Bauer adds that he started seeing people who wished they had acted sooner on a refinance to save more money on their mortgage payment. “I would rather see someone save $100 a month, even though they could have saved $400 if they had done it six months ago,” he says.
Although not everyone is simply looking for a better rate, notes Thorell. “People refinance to get money and accomplish different things — you have another kid, you need to do a renovation, or one of the employees decides to stay home to take care of the kids,” he says. “You could refinance to consolidate your debts to help your cash flow. It’s not necessarily a rate-driven decision. The term refinance markets have slowed considerably, but people have the option to do what they want to do.
Another aspect a borrower should consider when considering a refinance is where they are on the amortization schedule. A portion of each mortgage payment is dedicated to interest and the principal balance. At the start of the loan term, the vast majority of each installment is spent on interest, but later in the amortization schedule, the ratio begins to include a larger portion of the principal.
“If you’re in the seventh or eighth year of a 30-year fixed rate mortgage, each monthly payment you make reduces a good portion of the principal balance you owe on the mortgage. And if you refinance, that amortization table starts over from zero,” explains Trevor Halpern, CEO of Halpern Residential at North&Co. “Yes, your monthly payment is going to be lower, but you’re now going to incur a much larger total dollar amount to pay the bank in interest.”
Those tuned into the housing market have experienced fierce competition characterized by voracious demand and dwindling supply, driving up prices. Zillow Research March 2022 Market Report notes that the typical American home is worth 20.6% more than a year ago. It also shows a slight rebound in Phoenix for-sale inventory, with March 2022 showing a 6.4% month-over-month increase, but still down 9% year-over-year. other.
With rising interest rates, some owners may reconsider their sales plans, further reducing available inventory. “With today’s market, where prices have really increased rapidly over the last two years, everything is more expensive,” says Joel Johnson, president of East Valley Market for FirstBank. “If you combine the extra expense of the purchase price with a higher interest rate, it can significantly increase your payment. So I think people are going to be staying in their homes a bit longer and enjoying that comfortable payment that they got from refinancing over the last two years.
Although this is a fierce home hunting market, those looking for their first home are being hit hard. “The reality is that higher interest rates have an absolute effect on people’s ability to qualify for homes — especially first-time home buyers,” Halpern notes. “They typically don’t have a ton of money for a down payment and don’t have the value to turn the equity they built in a previous home into a down payment on the next.”
Plus, without equity to use as a down payment, aspiring homeowners end up with a larger initial mortgage balance and more interest to pay. Halpern adds that the general rule is that for every 1% increase in interest rates, the consumer loses 10% or more of their purchasing power, because a far greater portion of each monthly payment will be used to pay off that debt.
“If you came into the market to qualify for a mortgage a year ago, you qualified with an interest rate of 2.8% or 3%. Today you qualify for 5%,” concludes Halpern. “Guess what? This loan costs you 20% more now. Add to that the fact that the same house you could have bought two years ago is now 25% more expensive, the value proposition – the total effective combination of the actual list price plus the interest you pay – has changed where that house is costing you 30-35% more than it was a few years ago.