The financial crisis caused by the COVID-19 pandemic has led to a significant increase in mortgage refinancing among American homeowners.
Amid decreasing mortgage rates, many U.S. residents are swapping their old home loans for new ones, and they are saving money while doing so. After all, rates for 30-year fixed-rate home loans are currently averaging at a little under 3%.
Not all eligible mortgage holders have taken the refinancing route just yet. However, they may want to do so before the newly announced refinance fee is implemented, which could lead to an uptick in mortgage rates this fall.
According to MSN, mortgage refinances are about three times the level from a year ago, although there are still approximately 18 million eligible homeowners who could boost numbers even more.
A new report by mortgage data firm Black Knight shows that more than 2.3 million refinance loans were processed during April-June 2020, resulting in the biggest refinancing quarter in the last 17 years. Additionally, refinance originations rose by more than 200% in Q2 compared to the same period in 2019 and increased by 60% relative to the first quarter of 2020.
In a recent report, Attom Data Solutions determined which American cities have seen gains in refinancing activity due to steeply discounted mortgage rates. According to the company, refinance originations increased in all but one of the 211 U.S. metropolitan areas that were studied.
Here are the markets displaying the largest year-over-year refi increases in Q2:
- Madison, WI: +403.7% (more than fivefold)
- Hilton Head, SC: +358.7%
- Charleston, SC: +322.4%
- Greenville, SC: +321.8%
- Lincoln, NE: +269.2%
Meanwhile, Lexington, KY saw the smallest jump (7.5%), and Pittsburgh, PA, was the only major metro area to see a decrease in refinances over the second quarter.
U.S. residents who haven’t yet considered refinancing as an option might want to do so provided they:
- Can get a new loan that decreases their 30-year mortgage by at least three-quarters of one percentage point (for example, from 3.75% down to 3% or lower).
- Have at least 20% equity in their home (have paid off 20% of the value).
- Have good credit (score of 720 or better).
According to Black Knight, homeowners who fit the above criteria could end up saving about $290 a month ($3,500 per year) by refinancing to a lower rate.
Third Quarter Jump
Q3 of this year is expected to see even more refi activity than the second quarter did. One reason is that many borrowers took their first steps into refinancing this spring, so their mortgages are now being completed. Ben Graboske, president of Black Knight Data & Analytics, stated:
“Locks on refinance loans expected to close in the third quarter, assuming a 45-day lock-to-close timeline, are already up 20% from Q2.”
Another reason is that homeowners will likely apply for loans before lenders include the new 0.5% refinance fee in their interest rates, which could happen as early as October. The new fee will apply to refinance mortgages over $125,000, sold to Fannie Mae or Freddie Mac, which insure most of the home loans across the country.
New Refinancing Fee
As reported by The New York Times, the fee means that the average U.S. homeowner will spend an extra $1,400 to refinance a mortgage – money that the Federal Housing Finance Agency states will help deal with anticipated pandemic-related losses. The added cost can be spread out over the life of the mortgage.
The fee was initially announced in mid-August and was scheduled for Sept. 1. Within days of the announcement, 30-year mortgage rates increased from an average of 2.82% to 3.14%, according to Mortgage Daily News. Following widespread concern, the fee was then delayed; however, it is expected to be implemented in the coming months.
Homeowners can still shop around to find the best deal while mortgage rates are under 3% and don’t include the upcoming fee. According to Freddie Mac, getting more than one mortgage quote could save homeowners $1,500, while getting quotes from five lenders could save them an average of $3,000 over the life of the loan.