The Federal Home Loan Mortgage Corporation (Freddie Mac) recently reported that the average 30-year fixed-rate mortgage hit a record low of 2.98%. Some lenders are even offering 15-year fixed rates below 2%. These are incredibly low rates, attributed to our economy that continues to struggle from the effects of COVID-19.

Timing is right to have a look at refinancing your mortgage.

HOWEVER …

Before thinking you will comfortably slide into that sub-3.0% rate, there are some important concepts that Freddie Mac did not explain (assume a $200,000 mortgage in the examples below):

1. Consumers incur an average cost to “buy-down” the rate (aka “discount points”) of between 0.75% to 1.25% of the loan amount (they could therefore be assessed $1,500 to $2,500 at closing).
2. In addition to paying discount points, you could only obtain this record low rate if your credit score is at least 740. 
3. If you want a mortgage that is more than 60% of the value of your home, there would be “risk adjustment” charges of another $500 (or $1,000 if your equity is only 20%).
4. If your credit score is not optimal, be prepared for significantly more costs – and all these costs get factored into your rate [for example, a 640 credit score attaches a 3.25% ($6,500) charge, and another 2.625% ($5,250) if you decide to refinance more than just your existing mortgage].
5. The highest allowable loan-to-value ratio for most lenders is 80% for a “cash-out” refinance (reduced from 85% in 2019).

Here’s the Point:  "Now is the time to consider refinancing your mortgage, but don’t assume you will get a rate under 3.0% unless you pay discount points and have stellar credit with lots of equity."

Mike Kanuka, Founder & President