The average rate on America’s most popular home loan has fallen below 3% for the first time, as the incentive for homeowners to refinance their mortgage continues to grow.
According to the latest data (opens in new tab) from Freddie Mac, the interest rate on a 30-year fixed-rate mortgage averaged 2.98% last week, a reduction of 0.05 percentage points on a week earlier and a staggering 0.83 percentage points lower than a year ago. The rate is also the lowest recorded since the lender began tracking rates 50 years’ ago.
Could mortgage rates drop even lower?
While coronavirus has had a negative impact on almost all areas of American life, from the obvious detriment to health through to mass unemployment, disrupted incomes (opens in new tab) and rising debt (opens in new tab), one of the few positives to emerge is the cheap cost of mortgage refinancing. Indeed, the rates offered by the best refinance mortgage companies (opens in new tab) have been on a downward path ever since March, when the Federal Reserve cut short-term interest rates to zero in an attempt to bolster the economy.
With the grip of the pandemic seemingly firmer than ever, and so many unknowns over the future path of the US economy, many experts believe there is the potential for mortgage rates to fall lower still. Indeed, the deputy chief economist at Freddie Mac, Len Kiefer, recently suggested (opens in new tab) that “the 30-year mortgage rate could head to under 2.5” if rates continue to head towards the 10-year Treasury yield they normally track.
However, uncertainty abounds, and the popular wisdom remains that there is little point in waiting for further rate reductions before refinancing, given there is always the chance that they could start to rise. Taking such a risk also seems unnecessary when some of the best mortgage rates ever seen are already available.
How much could you save by refinancing your mortgage?
Indeed, for most homeowners, there will never have been a better time to refinance your mortgage (opens in new tab). Fannie Mae recently estimated (opens in new tab) that the prevalence of record low mortgage rates means that nearly 60% of all outstanding mortgage loan balances have at least a half-percentage point incentive to refinance.
Separately, the latest analysis (opens in new tab) from Black Knight suggests that 13.6 million refinance candidates in the US could save an average of $283 per month on their mortgage payment by switching to a cheaper deal from the best mortgage lenders (opens in new tab). Of these, some 4.6 million could save at least $300 per month on their mortgage payments, and 2.6 million would be able to save at least $400 per month.
So have most people been refinancing?
Given the significant mortgage savings that could potentially be made, it is unsurprising that refinance mortgage applications have spiked. For the week ending July 10, the Mortgage Bankers Association (MBA) reported (opens in new tab) that refinancing activity was some 107% higher than a year earlier.
However, the assumption is that the figures could be even higher still, were it not for mortgage companies becoming more careful (opens in new tab) over who they are willing to lend to. Amid the increased risk of job loss and the wider threats to the US economy, refinance lenders have been tightening their lending criteria, with the MBA recently reporting (opens in new tab) that the availability of mortgage credit in June had dropped to a low not seen since April 2014.
“Lenders are navigating a gradual economic and housing market recovery (opens in new tab) that is still facing headwinds from the ongoing COVID-19 pandemic," said Joel Kan, MBA's Associate Vice President of Economic and Industry Forecasting, adding that the willingness to lend to those wanting a jumbo loan or with lower credit scores (opens in new tab) has been diminished the most.
How can I improve my chances of refinancing success?
As a result, anyone thinking of refinancing their mortgage (opens in new tab) needs to give themselves the best chance of being accepted.
You’ll need to demonstrate to the refinance mortgage companies that you are an attractive lending proposition, and be able to show that what you are planning to borrow is viable in your circumstances. All lenders will want to see evidence of this, so preparing your proof of income, bank statements, identity forms and taxes (opens in new tab) is a must, as well as locating the paperwork you have for your current mortgage.
If you have debt, mortgage companies will want to know about this too. Proving your creditworthiness to mortgage lenders is key, so if your credit score is a little below par, the best credit repair services (opens in new tab) might be worth exploring to try and add a little shine to your credit rating. The best debt consolidation companies (opens in new tab) could potentially help if you think the amount you owe is likely to deter a mortgage company from lending to you.
If you think you’re in a good position to apply, also remember to shop around between the best refinance mortgage companies (opens in new tab) - mortgage rates might be at all-time lows, but some lenders will still be charging more than others, and you want to get the very best mortgage deal.