Key Things to Know When Refinancing During COVID-19
Mortgage interest rates have been volatile as the COVID-19 outbreak continues to disrupt businesses, jobs, and the economy. If recent volatility persists, mortgage refinances options could be hard to find, and opportunities available one day might not be available the next, which has many Americans asking whether this is a smart time to refinance.
If you’re looking to refinance during COVID-19, here are a few things to consider before making the move.
The Truth About Refinancing Your Mortgage
Generally, mortgage refinancing is the process of replacing your current home loan with another. Typically, the new loan will be for a similar amount but at a shorter loan term, reduced monthly payment, and at a lower interest rate. There are several financial factors to consider before you refinance including costs like closing costs, taxes, insurance, etc. Also, facts such as the age of your existing loan, how long you plan to remain in your home, and your plans for your monthly savings. Think carefully and make sure you’re confident that your finances can handle it before you re-sign on the dotted line.
One of the common misconceptions about refinancing during the COVID-19 outbreak is that it is impossible with social distancing. Many states are now starting to allow a sort of virtual signing known as eClosings. Remote Online Notarization is now permitted in 37 states, either permanently or as an emergency initiative during the pandemic. However, in most states where in-person signing is still needed to finalize your refinancing, it may be challenging, but still possible if you wear the proper protective face masks. Many attorneys ask clients to sit in their vehicles while signing documents, which are then passed through the car window and signed by a notary at a safe distance. Ask your lender to be sure if an in-person meeting is necessary. If it is, then it is highly recommended to use your own pen, sit at a distance from others, wear a face mask, and wash your hands thoroughly upon completion.
Reducing mortgage payments is also possible, even without refinancing. It’s called forbearance, which is a huge cost saving to homeowners who face financial hardships. Terms can vary depending on the type of mortgage you have, how long you’ve been paying it off, and the need to reduce your monthly payments. If your current mortgage qualifies for forbearance and might need it, refinancing might not be the best decision.
Does Receiving EIDL, PPP, or Other COVID-19 Assistance Affect My Ability to Refinance?
Even fully reimbursable loans like PPP will show up in your credit report, just like any other loan. When seeking out business loans, you will get a credit inquiry from the Small Business Administration (SBA). If your company is an S-Corp, LLC, or sole proprietorship, you will see the credit inquiry on your personal credit report, which will impact individual loan applications. If this credit inquiry happens during your escrow process, you run the risk of resetting the loan process.
Fortunately, direct payments during this crisis only have a positive impact as you can use these funds to pay off credit balances or increase the available funds required to close. The only visibility lenders will have on direct assistance is the balance in your bank account because there is no credit inquiry.
If you are receiving unemployment assistance in addition to the checks being sent to every person under the CARES act, this will likely have an impact as lenders are receiving additional requirements to prove income. Previously, the rules were more lenient, and previous years’ tax returns provided the primary basis for loan approval.
Additionally, business income is now a separate requirement. You may have to provide evidence of business continuity by providing invoices, payments received during the escrow period, or other proof.
Keep in mind that all lenders must follow the same guidelines, so your ability to finance with one lender is going to be similar or identical to your ability to finance with other lenders.
How Do I Get the Best Loan Interest Rate During This Crisis?
Rates have been trending down for several weeks. Surprisingly, rates fluctuate even as the lending rate set by the government hasn’t changed over this period. Rates for a 15-year fixed APR loan is as low as 2.59%. A moderate change in interest may not lower your monthly payment by as much as you might think. Use a mortgage calculator to understand how much you’ll save monthly at a lower rate. Although interest rates are trending downward, they are likely to stay low for the foreseeable future.
There are factors other than interest rates to consider when shopping around. First, many lenders will contribute to closing costs. This can be as much as several thousand towards closing. This is one of the big differentiators between loan offers. Second, an appraisal will be ordered on your property and might allow you to remove your mortgage insurance payment if one exists.
Even though low rates are very enticing, many borrowers will pull out home equity in the years to come. When evaluating the lending offer, getting a full picture of how long you’re likely to stay with the loan is crucial. This will help determine if the amount of money needed to close compared to the amount of money saved monthly is worthwhile. Also, a new loan resets your loan period back to 30 or 15 years. If for some reason, the rate is the most important factor for you, you can pay upfront to lower the rate.
Know When Your Credit Card Reports to Credit Bureaus, So You Know When to Pay off Your Credit Card (Even If You Pay It off Every Month)
If you use your credit cards every month (as we all do) and you carry a significant balance, it can affect your ability to refinance. This can be a factor even if you pay your statement balance every month. What you may not realize is that credit card companies report to the credit bureaus (Experian, Equifax, TransUnion) at least monthly and not in conjunction with your payment due date. Additionally, even if you pay your statement balance every month, you’re still carrying debt on your card, which will show up on your credit report.
A common recommendation is to keep your credit card paid off 30 days before you start and during the process until the loan closes. If you know when your credit card updates the credit bureaus you can time your payoff. Chase, for example, reports credit card balances on the 15th for at least some of its cards. It may report it more often in some cases. If you are unable to determine the day of the month your credit card company reports, you’ll want to try to reduce any credit card balances before your prospective lenders run credit checks on you.
Make Sure You Have All Relevant Tax and Financial Documents Certified.
Especially during this crisis, every corner of your financial life will be inspected, so it’s essential to provide as much proof as possible. In certain cases, you may need to translate financial documents and have them certified before they can be used as evidence.
