As coronavirus fears continue to impact the markets, the Federal Reserve is considering lowering interest rates to zero in the coming weeks. Following last week’s interest rate cut of 50 basis points, this latest effort to revive the markets signals increased concern about a market downturn.
Earlier this week, the Mortgage Bankers Association (MBA) forecasted total mortgage originations of approximately $2.61 trillion this year, a jump from last month’s forecast of $1.99 trillion. Refinancing expectations are the key drivers of the change, jumping 36.7% from last year, and reshaping existing forecasts across the mortgage and refinance sector.
What to Consider When Refinancing
“The issue of refinancing is coming up with clients who are considering refinancing or changing from a 30-year mortgage to a 15-year mortgage or to get a fixed rate rather than a variable one,” says Cathy Curtis, the founder of Curtis Financial Planning, LLC. To help clients make the best decisions, she’s advising them to consider their overall financial picture as well as how long they’re planning on staying in their current home. “Because there are costs to refinancing, doing so makes the most sense for people who plan to stay in their homes for a while or where the cost savings from the lower payment reach break-even point within a few years,” she explains.
Another consideration is the length of clients’ existing mortgages. Ted Jenkin, CEO of oXYGen Financial Inc., has been advising clients to be wary of re-extending their mortgage life. “If they’ve paid off 10 years of a 30-year mortgage, it’s important to consider taking out a 20-year loan versus a 30-year loan so they don’t extend their mortgage into retirement.”
Advice for Clients
Among the advisors we spoke with, several agreed that the current market conditions tend to favor those with longer investment horizons and those who are already considering refinancing. “The current environment seems to be more advantageous for those in the accumulation stage and less ideal for retirement investors,” says Brandon Garrett, President and Chief Investment Officer at Snow Garrett Wealth Management.
“As younger investors acquire real estate and buy stocks, current mortgage rates and lower stock prices should incentivize activity and prove to be beneficial long-term,” he explains. “On the contrary, the average retiree has ideally already paid off or at least refinanced their mortgage at comparatively low rates several years ago, so they are likely less incentivized to take on new or refinance existing debt.” To help clients make informed decisions, it’s important to review their individual circumstances and assess their goals to ensure that they’re able to make the most of whatever refinancing opportunities are available.
The Bottom Line
Many of the advisors we spoke with agreed that refinancing could be beneficial for certain clients under the current market conditions. But they also advised that those decisions need to be made on a case-by-case basis. For clients who don’t have high levels of debt, and those who aren’t planning to stay in their homes for the long-term, staying the course may still be the best bet.