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Should You Buy A House or Refinance Your Mortgage Right Now?

a couple looking over housing prices and loan rates

The international COVID-19 (coronavirus) pandemic has affected many aspects of our lives over the past few months -- from staying at home to slow the spread of the virus, to becoming homeschool teachers for our children, to having concerns about the future.

However, we as individuals aren’t the only ones being strongly impacted by this unexpected situation. From the global financial markets to the U.S. stock markets here at home, we’re seeing a lot of volatility in the financial world. You may feel these impacts in a few different ways.

For example, you may have heard how the U.S. Federal Reserve has slashed interest rates to historic low levels as a result of COVID-19. And it may have you wondering whether now might finally be the right time to buy a home. Or, if you’re already a homeowner, what about refinancing your mortgage to benefit from the COVID-19 interest rates?

If you’re considering either of these options, be sure to keep the following information in mind.

Is It a Good Time to Get a Mortgage and Buy a House?
If you’ve been waiting to buy a house for whatever reason, now might be a good time. Millennials in particular have a low rate of homeownership compared to other generations. In general, they prefer to live with family or friends and are much more likely to rent.

According to Statista, only 11% of younger millennials and 29% of older millennials owned homes in 2017; however, 80% of all millennials reported that they plan to eventually buy a house. And “eventually” might be right now.

Whether you’re a millennial or part of another generation, the current low interest rates brought on by COVID-19 may be enough to inspire you to move forward with the home-buying process. But it’s important to weigh your options and evaluate the state of the housing market – now, and for the future.

Interest rates may be low, but they could come at a different cost: statistics by Black Knight, a real estate data company, show that the impact of COVID-19 on the housing market is leaving potential home buyers with fewer options. As of the third week of April, new real estate listings were nearly 70% below the level at the same time last year.

In uncertain times such as these, it’s understandable that you may have concerns about the future of the housing market, including your ability to increase your home’s value and the ability to sell it someday. However, buying a home and capitalizing on low interest rates may make good financial sense for someone with guaranteed job stability and who plans to stay in their home for at least five years.

Refinancing Your Mortgage
For some people who are already homeowners, a mortgage refinance may be a good way to benefit from the historic low interest rates. Just since the end of April, the 30-year fixed-rate average fell to 3.23 percent, which is the lowest rate in at least 49 years.

And refinancing is a popular choice right now. According to the Mortgage Bankers Association, the Refinance Index increased 79% from the week before in early March, bringing the Index its highest level since April 2009. This means that the number of refinance applications are at a high.

When it comes to refinancing your mortgage, there are generally two different types of refinancing options available: a rate-and-term refinance, and a cash-out refinance.

The more traditional option, a rate-and-term refinance is a way for homeowners to:
  • Renegotiate the life of the loan.
  • Obtain terms that are more favorable.
  • Get a lower interest rate.
  • Change from an adjustable-rate mortgage to a fixed rate.
Who should consider a traditional refinance? Remember that the refinance process itself will cost you money, so it might not be the right choice for everyone. However, it may make sense for you if you are financially stable and a refinance would decrease your interest rate by at least 1-2%.

Another reason to consider a refinance is to reduce your term. People who refinance often look at reducing the duration of their loan from 30 to 15 years. Why? First, the interest rate on a 15-year mortgage is usually lower than a 30-year loan. Second, with the shorter loan duration, you’ll likely save a significant amount of money in interest over the life of loan.

Either way — same term with a lower interest rate or a shorter term — you can ensure you’re saving money in the long run.

With the other type of refinance option, a cash-out refinance, homeowners can convert home equity into cash. By taking out a mortgage for a larger amount than the previously existing mortgage loan amount, the difference is paid out to the homeowner in cash. This may be a good option for homeowners who find themselves low on funds as a result of COVID-19.

Consider the Uncertainty
While it may be tempting to buy a home or refinance your mortgage as a result of the historic low interest rates, it’s important to consider all sides of the situation, especially given the uncertainty of the COVID-19 situation.

Taking on a new financial responsibility, such as buying a house, may not make sense for everyone in the current climate. Especially if there are other areas of your life that have been impacted financially by COVID-19.

And for those who are interested in refinancing their mortgages, it could be a bit more difficult to get approved, according to a recent article by USA Today. As the unemployment numbers spike to record numbers across the U.S., people who are unemployed could struggle to qualify for a new mortgage.

And if you were looking at a cash-out refinance, the homeowner does receive the benefit of the near-term influx of cash. Still, consider the use of your home’s equity as collateral in an uncertain time like this. With a cash-out refinance, the risk of foreclosure does exist if the homeowner fails to make loan payments.

Academy Bank is Working for You
Despite the uncertainty, Academy Bank wants you to know that we’re here, and we are working to be your go-to bank for all your financial needs.

Discover your home loan or refinance options and find what's right for you – all with less stress.

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