How COVID-19 Affects Mortgage Refinancing

What you need to know about COVID-19 and how it is affecting mortgage refinancing

The economic impact of the COVID-19 pandemic is huge, yet not completely obvious yet. To help combat financial hardships for Americans, several actions have been implemented by the federal government, from extended unemployment benefits to individual stimulus checks for qualifying taxpayers. 

Many factors are also impacting mortgage rates, causing many homeowners to consider refinancing, despite so much uncertainty in the world. Find out how refinance rates are faring in light of the global COVID-19 outbreak and whether it’s the right time for you to get a new mortgage.

Impact of Fed Emergency Rate Cuts on Refinancing

The federal funds rate isn’t a direct correlation to mortgages but instead refers to the interest banks charge each other for borrowed funds. But in most cases, mortgage rates typically follow the same trajectory as the federal funds rate.

Compared to other times in recent history, rates were already at near-historic lows. However, the country’s quickly deteriorating economic conditions as a result of social distancing and stay-at-home orders prompted the Federal Reserve to enact two emergency rate cuts in the month of March.

On March 3, the Fed cut back the rate by 0.5%, which was followed by a 1.0% reduction on March 15. That puts the rate range between 0.0% and 0.25%. The idea is to stimulate the economy by making it more affordable for businesses and individuals to borrow money.

Homeowners are often folded into this group by enjoying lower rates that can potentially lower their monthly mortgage rate by refinancing — assuming you meet other loan eligibility requirements. And while you wouldn’t expect to get a 0% interest rate, a lower fed funds rate does normally result in lower refinance rates.

The downside to this situation is that the COVID-19 pandemic is anything but normal.

Volatility Causing Mortgage Rate Fluctuations

The economy and stock market are both going through a turbulent period and that volatility can be reflected in higher mortgage refinance rates. The result is rates that can actually vary day by day and lender by lender. 

So what forces are causing volatility and putting upward pressure on refinancing rates?

The biggest issue is that there’s no specific timeline on when to expect normal activities to resume. Currently, President Trump has extended social distancing to at least April 30, while dozens of state governors have ordered residents to stay at home unless they’re on essential business, like going grocery shopping.

Entertainment and retail venues are shuttering and unemployment claims have surpassed 3.2 million. The stock market dropped so violently throughout March that automatic trading pauses were enacted on multiple occasions.

All of these extremes are causing major fluctuations in interest rates. Lenders may be less likely to offer low rates when job stability, for example, is just not guaranteed for many people today.

How to Assess Your Personal Situation

Refinancing your mortgage, especially in order to get a lower rate, comes with the obvious benefit of saving money each month. However, with health and economic concerns mounting, it’s smart to consider your personal situation to make sure refinancing is a good idea right now — for both your application but also your own peace of mind.

Job Stability. A lot of industries are impacted by social distancing guidelines right now, shuttering businesses that involve large congregations of people or non-essential work that can’t be performed virtually. Even if your work hasn’t been impacted yet, think long and hard about how stable your company (and position) feels.

Credit Score. While lending standards haven’t technically changed for minimum mortgage requirements, some lenders are implementing their own stricter standards to vet applications. HousingWire reported that many FHA lenders, for example, have increased the minimum credit score from 580 to 660. If you’re considering a refinance on your home, ask lenders about any changes in credit score requirements to make sure you’re still eligible.

Health. Money isn’t the only factor to consider when refinancing during COVID-19. You also need to think about your health. While refinancing definitely takes less interaction compared to selling your house, you still need to have an appraiser come into your home and meet with a notary to sign your new closing. If you’re in a high-risk group for contracting COVID-19, you might consider holding off on your refinance application until the risk for infection has lowered.

Bottom Line

It’s still possible to refinance your mortgage despite the uncertainty surrounding the COVID-19 pandemic. The process may take longer so talk to your lender about what to expect based on your application and job situation. If you do qualify, you might get to take advantage of low rates and lock in a lower mortgage payment for the years ahead.

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