Refinancing Is Hot—But What about the Economy?Submitted by Bernhardt Wealth Management on June 29th, 2020
The last time we discussed the pros and cons of refinancing your mortgage was in our blog dated September 9, 2019. At that time, the rates on 30-year mortgages averaged just under 3.8%, and the Fed was nudging interest rates lower in an effort to extend what was at that time the longest-running bull market in history. Though there were problems on the economic horizon, including ongoing spats with China over international trade, the economy was still showing strong growth and stock prices were continuing a long-term rising trend.
Today, the landscape has shifted significantly. While the Fed has pushed rates even lower than in the fall of 2019—the interest on short-term interbank loans in September 2019 was just over 2%; currently it is barely above zero, at 0.25%—the economy is in a deep recession because of the impact of the coronavirus pandemic. And while the stock market has recovered much of the ground it lost in March and April, when it fell by more than 30% amid a global shutdown, it continues to be susceptible to negative shocks and especially vulnerable to evidence that the coronavirus pandemic continues to spread.
All that said, mortgage rates are currently even lower than they were previously; the benchmark 30-year fixed mortgage rate is 3.33%, just eight basis points above the all-time low (since 1971) of 3.25%. Not surprisingly, many are looking into refinancing their mortgages while rates are at bargain-basement levels. Interest rates are a function of federal monetary policy, among other factors, and right now the Fed is intent on maintaining ample liquidity to help the ailing economy. Borrowers with secure incomes and a long horizon for owning their homes are interested in saving money on interest, especially while the economic outlook remains uncertain.
Should you be looking to refinance, given the fact that the economy is currently in recession, and the outlook for a quick recovery is far from certain? As we indicated in a previous blog from May 1, 2017, you need to look at more than just your savings in interest payments as you consider refinancing. You should also consider the closing costs associated with refinancing, balancing them against the monthly savings on interest. A handy formula is dividing your estimated closing costs by the monthly reduction in your interest payments to see how many months you’ll need to recover the closing costs in interest savings. For example, if your closing costs are $3,000, but the new payments will save you $100 monthly in interest, it will take 30 months for you to recoup the closing costs. As long as you plan to stay in your present home longer than 30 months, refinancing might make sense.
You also need to look at how much the new loan will cost in interest over the life of the loan. For example, if you are ten years into a 30-year loan, and you refinance your existing balance with a new 30-year loan, your monthly payments will probably drop considerably. However, you will be paying interest—albeit at a lower rate—for an extra ten years. How much more interest will it cost you if you refinance? Are you comfortable with that? These are the kinds of questions you need to be asking as you consider refinancing.
Finally, and perhaps most importantly, you need to consider the effect of the current economy on your personal finances. Is your job secure during a recession? Has your industry been more severely affected than others by the pandemic? If your outlook is uncertain, now may not be the time to make any sudden moves that would change your debt-to-income ratio. On the other hand, if you are able to qualify for refinancing, the monthly savings could be helpful if your income were to be reduced in the near future.
If you would like a careful, professional review of your personal finances, your investments, or wealth management plan, we would be happy to talk with you. We specialize in helping clients form solid, long-term financial plans in order to achieve their most important goals.