Is it the Right Time for an FHA Refinance?

With historically low interest rates, the mortgage industry has seen a sharp uptick in refinances. Taking advantage of the current market might be in your best interest and could lower your monthly payment significantly. If you are thinking about jumping on the low rates, it’s important that you understand just how we got here, so you are able to make the best financial decision for yourself.  

 Changes in 2019 and 2020 

Refinances picked up back in 2019 when the interest rates fell to – what was considered at the time—historically low rates. While some questioned whether the rates would drop further, many decided it was best not to miss out on the opportunity and decided it was time to capitalize on the market rates and jumped on refinancing their home loans. Then, in 2020, central banking policies put in place to help support the ailing economy resulted in interest rates dropping even further. 

Why Rates Kept Falling? 

We know by now that average interest rates in the mortgage industry vary based on many factors. However, 2020’s falling rates are in large part due to the Federal Reserve providing liquidity to help stabilize financial markets. With the pandemic causing so many businesses to fail, the Fed’s policy of bond buying brought down interest rates in many areas, including mortgage loans. 

The Refinance Savings 

In September, 2020, Freddie Mac reported that the average interest rate for a 30-year mortgage had reach a new low of 2.86%. With that, the average savings among high-quality refinance candidates would be about $299 a month, and nearly 2.5 million Americans could save $500 or more per month. It is estimated that if all 19.3 million mortgage holders were to take advantage of the rates, it would net a total potential savings of $5.8 billion per month. 

Should I Refinance? 

While these are all huge numbers, it’s important to weigh whether a refinance is in your best interest.  

Don’t forget that refinancing a mortgage comes with closing costs. For some borrowers, they might not make back enough to offset those costs, therefore it may not be worth their time. not be worth the time or money to deal with it. A good way to measure whether refinancing is worth the money is calculating how long you need to reside in the home to recoup the closing cost of refinancing in the interest you save. Plan to live in your home long enough to break even.  

With the number of refinances being at a record high, lenders and financial institutions are experiencing a back log, and the time it takes to complete a refinance is slower. They are at an all-time high and that means lenders are experiencing a huge number of applications, which could potentially make loans slower to process. 

Additionally, given the recent pandemic and boom in refinancing, many lenders have added requirements to qualify for refinances, especially for government-backed mortgages like FHA programs. This can change a borrower’s mind if they have recently been laid off or had a crop in their credit scores.  

There is no way to say for certain how long interest rates will stay low, and projections can still be incorrect. If you haven’t done so recently, it is worth having your mortgage reviewed by your loan officer to see if a refinance will be a smart move. 

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