The teaser rate screams 2.75%. You rush to call your mortgage banker. “2.75%?! Sign me up,” you say.
“Great,” says your mortgage banker. “Just fill out this paperwork.”
You fill out the forms (a lot of them) and then, you wait. And, wait. And, wait.
Eventually, you hear back from the bank. It turns out, that rate on the 30-year-fixed? The one you called about. Well, it isn’t quite as available as you thought. Instead the bank offers you 3.5%. Historically, still a great rate — but, certainly not 2.75%.
What You Need To Know About Refinancing in the Era of Covid
You see, refinancing your home in the middle of a pandemic is a lot harder than ever before. Harder, perhaps, than even in 2008. That’s because back in the financial crisis of 2008, banks learned the hard way that they needed to be more measured with their risk.
So, this time around, as the world confronted a massive economic slowdown, surging unemployment and a global pandemic, banks naturally pulled back from lending.
This means, even though rates are low (hey, everyone wants to still be invested in the U.S. and the Federal Reserve is promising to stay accommodative for the foreseeable future) GETTING those low rates can be quite tricky.
Here’s what you need to know to qualify for the best possible rate:
- Credit Score – Mortgage brokers say they need high 700s. Ideally, 780.
- A steady paycheck. (If you own your own business, there are some additional hoops they want you to jump through because they want to evaluate the credit risk of your business itself.)
- A loan-to-value ratio of 60%. A loan-to-value ratio is what lenders use to calculate risk. If you own 40% of the valuation of the property, and they’re lending you 60% of the remaining amount, you’re less likely to walk away from your investment than say, if you only had equity in the home worth 5 or 10%.
- An up-to-date payment history. In other words, you have been paying your mortgage on time already. (An important note on this: Washington lawmakers have allowed a forbearance on mortgages and specifically said those who don’t pay their mortgages may not have their credit scores altered as a result. Banks say, no worries – we won’t change your credit score…BUT, before we sign on as your lender, we need to see a consistent payment history. For some major banks, they need proof of the mortgage being current and at least three recent on-time payments.)
Another thing to be aware of right now?
Regional economic sensitivities.
For example, some banks are pulling back on their lending in Texas amid concerns of challenges in the oil market. Meanwhile, other lenders are shutting down their lending in challenged condo markets like New York City, again amid economic concerns in the area and a more challenging real estate environment. On the other hand, Florida is seeing a massive boom so lenders are active in the state (thereby helping to lower rates.)
Keep connecting with your mortgage banker or broker. It’s clear there’s a ton of demand for refinancing right now and some banks are challenged trying to keep up with the volume. Nonetheless, if you’re able to lock in that great rate, you’re savings could be massive in the coming years.
Good luck – let all of us here at Mystical Living know how it’s going! Please log in below and give us your tips.