Low mortgage rates sparked a refinance frenzy at the beginning of 2020, overburdening many lenders who simply couldn’t meet the demand. Now, a new report released Monday by data analytics company Black Knight shows just how much demand there was: More than 1.3 million homeowners refinanced during the first three months of 2020, hitting a seven-year high.
Homeowners enjoyed record levels of home equity while facing economic uncertainty as the pandemic began rattling the country earlier this year, prompting folks to line up for lower rates. This trend has persisted into July as current refinance activity is 74% higher than this time last year, according to the latest Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey.
Rates on the 30-year fixed mortgage have steadily dropped from 3.5% in late March to 3.07% last week, Freddie Mac’s lowest recorded level, while the 15-year fixed-rate slid to 2.56%, the lowest in seven years. A recent Fannie Mae forecast pegs rates at 3% during the last three months of the year and 2.9% by early 2021.
“The spread between the 10-year Treasury and mortgage rates is still wide, so there’s room for mortgage rates to fall. We could see rates drop to 2.7, 2.8, 2.9%,” says Ralph B. McLaughlin, chief economist and senior vice president of analytics at Haus, a co-investment platform for home ownership. “If we get a vaccine for the virus or the effects are lessened and people pull their money out of bonds, we’ll see increased yields which will drive up rates.”
Although today’s ultra-low rates give borrowers a chance to save money on a mortgage refinance, lenders have made it more difficult to qualify. We’ll tell you how to improve your chances of getting a low rate.
Homeowners Have More Equity, but They’re Not Using it
Borrowers’ appetites for saving money via refinancing is strong, but they are not as interested in withdrawing cash from their homes, confounding some experts.
“We are not seeing an increase in cash-out refinances, which surprised us. With the COVID impact, we thought there would be more interest in home improvement and upgrades, but that’s not the case,” says Glenn Brunker, mortgage executive at Ally Home.
In the first quarter of 2020, homeowners received an 8% boost in home equity, according to Black Knight. Propelled by an 11% hike in home values during the same quarter, the total amount of home equity in the U.S. hit a new high of $6.5 trillion.
However, homeowners were not tapping it, despite the surge in refinancing. The number of cash-out refinances decreased, bringing the cash-out refi share of total refinancing to 42% in Q1. This is the lowest volume since the beginning of 2016.
“The decline seen in Q1 cash-out refinance lending is likely the result of a combination of factors. Credit tightening, more acutely seen among cash-out refinances, is certainly one such factor,” says Andy Walden, economist and director of market research at Black Knight. “There’s also the unfortunate reality that the homeowners most in need of tapping their equity—due to loss of income or unemployment—may now also be the least likely to qualify for the same reasons.”
It’s Tougher to Qualify for a Mortgage Refinance
Many lenders have tightened borrower requirements, trimming things like the required loan-to-value (LTV) ratio from 80% to 70% in cash-out refis and boosting FICO score minimums on all refinanced mortgages, Walden says. Black Knight reported a dramatic rise in credit scores among cash-out refinance rate locks, zooming 24 points—from 720 to 744— from January through June.
Both Fannie Mae and Freddie Mac, the two biggest buyers of mortgages on the secondary market, have stiffened requirements for self-employed borrowers, as well. They now require a current audited profit-and-loss statement, showing revenue, expenses and net income as well as the last two business depository statements.
The credit crunch is a direct result of a still murky economic outlook. The Department of Labor reported there were 1.4 million unemployment claims during the last week of June, as the unemployment rate took a surprising 2.2 percentage point dip to 11.1%. Lenders likely will keep credit tight as they try to mitigate risk until the economy is on solid ground.
How To Get the Lowest Mortgage Rate
The most powerful tool borrowers have in snagging a low mortgage rate is their FICO score. This is good news, as controlling your credit score is easier than doing things like improving your disposable income by jumping income brackets. Since rates are expected to stay low, you’ll likely have time to punch up your score.
FICO scores are made up of five credit factors, and they are not weighted evenly:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Type of credit (10%)
- New credit lines (10%)
You can improve in some of these areas more quickly than others. Here’s what to do:
Straighten your payment history over time. If you sometimes or usually pay your credit card, mortgage, auto loan bills late, this will have a negative impact on your score. The moment you begin making on-time payments, however, you’ll be on your way to a better score—it just won’t happen right away.
Pay down debt. You can impact the amount you owe more quickly than you can improve your payment history, provided you have cash on hand. Keep in mind, FICO treats debt types differently. For example, installment loans (such as car loans) don’t have the same negative impact as high credit utilization on credit cards. You should keep your credit card balances below 30%. Maxing out your credit, even if you make on-time payments, can hurt your score.
Don’t close your credit accounts. This applies to accounts you don’t use, too, unless there’s an annual fee and you’re not reaping any benefits. Keeping accounts open will help you build a credit history, which is 15% of your FICO score.
Shop around. Make sure you compare quotes from multiple lenders. Be sure to look at the APR, not just the interest rate. The APR is the all-in cost of borrowing, which includes lender fees as well as the rate. Lender fees vary, so comparison shopping can definitely save you money.