With the economy currently in unprecedented territory, homebuyers in search of a new mortgage undoubtedly have questions on how and when to proceed. To help, here are answers to 12 of the most frequently asked mortgage questions.
1. Are mortgage rates decreasing?
While mortgage rates are down from a year ago, they are up from a few weeks ago. So, it’s unclear whether they’ll be headed down again. In a recent realtor.com article about mortgage rate fluctuations, Matthew Graham, chief operating officer of Mortgage News Daily, said rates are “the most volatile they’ve ever been, by a wide margin.” Much like the stock market, mortgage rates have been on a wild ride.
In early March, rates were at a record low, then increased again. Mortgage interest rates are closely correlated with the 10-year Treasury yield, which has remained below 1 percent for much of the last month. Bad economic news usually is good news for mortgage rates. Mortgage rates likely will stay low as long as the 10-year Treasury yield also remains at its low levels.
2. Why have mortgage rates risen?
Despite the negative economic news, mortgage rates have gone back up after hitting a record low in early March. What has caused an upward trend in rates? In short, homeowners rushed to take advantage of low rates and refinance their existing mortgages. To handle the rush, many lenders raised rates, in hopes of slowing the charge. In the secondary mortgage market, a wave of refinancing created a glut—which sent rates higher.
Lenders often bundle and sell some of their home loans as mortgage-backed securities on the secondary market. This frees up cash for lenders to make new loans. More bundled loans on the market meant lower prices for those securities. Although rates have crept up, there’s room for them to fall again with so much uncertainty in the marketplace. Because we’re in uncharted territory, you can’t look to history to predict what could happen.
3. What are mortgage rates today?
Mortgage rates change daily (even hourly), and a number of elements factor into the rate a borrower locks in. Although many people follow the Federal Reserve’s actions when it cuts or raises the federal funds rate, that doesn’t directly affect mortgage rates because you’re not getting a mortgage directly from the Fed. Instead, you’re getting it through a service provider. Mortgage rates are influenced by both the federal funds rate and the Treasury bond market. Each lender also adds a percentage to the rate to account for various company fees. So, even when the federal funds rate is at 0 percent, you won’t find a mortgage that allows you to borrow with zero interest.
4. Should I refinance my mortgage now?
Mortgage rates are low, and if you secured a mortgage in early from 2017 to early 2019, you’re likely a solid candidate for a refinance. Be aware, though, that a refinance replaces the original loan with a new one and you might have to change lenders. To determine if you can save some money, consider the costs of refinancing. The realtor.com refinance calculator can help you determine if refinancing is a smart strategy.
5. My mortgage payment is too high—what can I do?
If your mortgage payment is too high, you might want to consider refinancing if the timing is right. If your payment is too high due to a furlough or job loss, refinancing probably isn’t an option. However, you can consider mortgage forbearance or a mortgage deferral. Call your lender to learn about your options.
6. Can I stop paying my mortgage for a few months?
Because of the pandemic, borrowers across the country are dealing with unemployment or furloughs. Lenders understand the current economic situation and are offering options to clients who can’t currently pay their mortgage. Policies vary, but some lenders are allowing borrowers to pause payments for a few months. Several are waiving late fees, penalties and the reporting to credit bureaus that often come with missing payments. However, it’s a bad idea to stop paying without contacting your lender.
Without a plan in place, you’ll accrue late fees and eventually face foreclosure proceedings. Keep in mind: When a deferment or forbearance period is finished, the missed payments are due. So, there is no free money. However, many lenders are allowing customers to work out terms other than paying a lump sum at the end of the forbearance period. When you contact your lender, be honest about your financial situation.
7. What are the repercussions if I stop paying my mortgage?
Again: Don’t do it. Speak to your lender. Putting your head in the sand and simply not paying your mortgage is a bad move and can have serious consequences. If you stop paying and ask for forgiveness months down the road, lenders might not be as willing to help you. Your decision also will affect your credit score, hampering your chances of obtaining any kind of loan in the future. It’s important to prioritize what you can and can’t pay, and it’s better to pay secured debt such as mortgage and car payments before credit cards.
8. What is a cash-out refinance?
This is a way to refinance a mortgage and turn some of the equity in your home into cash. This strategy typically is used for home improvements or to consolidate debt. It differs from the main goal of a traditional refinance, which is to lower your monthly payment. With a cash-out refinance, you’ll get money back from the bank. The loan usually has a fixed rate, unlike a home equity line of credit, which often has a variable rate. A cash-out refinance also replaces the first mortgage and doesn’t add a second mortgage like a home equity line of credit.
9. What is mortgage forbearance?
Forbearance allows a borrower to either pay a lesser amount of their mortgage—or not pay anything at all—for a certain amount of time. At the end of the forbearance period, the amount of the missed payments is due, often in a lump sum. However, lenders do sometimes allow payment plans. Forbearance is for a short and specified term and does not change the terms of your loan. During forbearance, lenders won’t charge late fees or penalties, report missed payments to the credit bureaus, or begin foreclosure proceedings.
Lenders will not automatically offer forbearance if you miss a payment. A plan must be in place if you think you can’t make your monthly payment. A solid payment history helps in forbearance cases, but in these unprecedented times, many lenders are changing their rules and regulations.
10. What is a loan modification, and how do I get one?
A loan modification changes the original terms of a mortgage loan. It differs from a refinance in that it does not pay off the original loan and replace it with a new one. Instead, it changes the conditions of the current loan. Loan modifications can include an interest rate change, an extension in the payment schedule, a different type of loan altogether, or a combination of these. A homeowner can only get a loan modification through their current mortgage servicer because they must consent to the terms.
11. Should I get a home equity line of credit?
A home equity line of credit (or HELOC) can help you turn the equity you’ve built up in your home into cash. This financial tool usually is deployed for home improvement projects or updates. But in current financial times, people are using HELOCs to pay bills. You can only get a HELOC if you have built up equity in your home. So, if you put 0 percent down on your home, have an interest-only loan or have owned your home for less than a couple of years, there likely won’t be any equity to tap.
The interest rate on a HELOC often is variable, meaning it will adjust up during the period of the loan. Although rates are low right now, there are risks associated with a HELOC. It’s a secured debt, and although it’s a lower-cost option to borrow money than credit cards, there are risks.
12. Where can I find a mortgage calculator?
A mortgage calculator can help you figure out what you can afford and how much you’ll need to borrow. The calculator will help estimate your entire monthly house payment—the principal, interest, taxes, homeowner’s insurance, and private mortgage insurance.
As you adjust the different numbers, you’ll see how your monthly payment can slide up or down. The largest variables at play are the home price and how much money you plan to put toward a down payment. Realtor.com also provides an affordability calculator to help you figure out how much you can afford to spend each month on your mortgage.
