I used to think that in my 35 plus years in the financial industry, I had seen it all. However, then came the Coronavirus and everything changed. We have entered a new world and things will be different moving forward. That being said, something just happened that I never thought would happen. What I’m referring to is that for the first time in history, a 30-year fixed rate mortgage was below three percent.
When I started my career, a 30-year fixed rate mortgage averaged between 14 and 15 percent. In fact, when I got my very first mortgage in the early 80s, I went with a 12 ¾ percent adjustable rate mortgage. Rates today are at historic lows. Some brokers are even quoting below 3 percent. Low mortgage rates can create opportunities for many people. However, with opportunities also come mine fields that are important to understand before you rush to get a new mortgage.
When you hear mortgage companies advertise rates at below three percent, that doesn’t necessarily mean that you are going to qualify for that rate. One key factor is your credit scores. Simply, the higher your credit score, the lower the interest rate. Because your credit score is so important in determining your rate, it is critical to review your credit score prior to applying for a mortgage. It is not unusual for credit reports to have errors, and those errors can result in you paying a higher rate of interest. If you are thinking of refinancing or buying a new home, it pays to review your credit report as soon as possible and to begin the process of disputing any errors. Typically, under the Fair Credit Reporting Act, the credit bureau generally has 30 days to investigate your claim. To get a free copy of your credit report, check out www.Annualcreditreport.com. Usually you can only get a free credit report once a year; however, due to the pandemic you can now get your credit report weekly for free.
When it comes to refinancing your mortgage, you can’t only focus on the interest rate; you also have to focus on the costs. The costs that you pay to refinance are important in determining whether it makes sense to refinance or not. I see situations all the time where someone refinances to a lower interest rate, but because of the costs, they’re actually in worse financial shape than before the refinance. Your goal of refinancing is to improve your financial position; it is not to make money for the mortgage company. Costs do matter. In that regard, some mortgage companies have gotten very creative as to their fees. That is why when you receive a bid from a mortgage company, you need to find out the total out-the-door cost of the mortgage. It is only when you know the total cost of the mortgage that you can make an informed decision whether it pays to refinance or not.
My general rule is that by having lower mortgage payments, if you can recoup the cost of the refinance within a two to three year period, and you plan to be in the home at least five years, then it pays to refinance. On the other hand, if you’re only planning on being in the house for a year or two, refinancing would not be a very good option for you.
I’m a big believer that when it comes to mortgages, it pays to shop around and get competitive bids. However, it is also important to make sure that you deal with a quality mortgage company. To me, a good mortgage company is one that not only explains all the mortgage options available to you, but is also transparent with their fees and doesn’t pressure you in any way. There are many very good companies in our area, but unfortunately, there are also ones that are not very consumer friendly. Therefore, not only do you need to do your homework when it comes to rates and costs, but you also want to make sure you’re dealing with a quality company. After all, for most of us, our home is our single largest asset and the last thing we want is trouble with our mortgage.
Good luck!
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.