The Invisible Stimulus Package: Homeowners Who Refinance
By Jennifer Quinn
Florida Realtors economist: The most often discussed form of stimulus from the government? Direct payments to qualifying Americans. But low interest rates offer another form of stimulus for homeowners who are able to refinance.
ORLANDO, Fla. – A few things gained significant popularity in 2020: sourdough starters, home exercise equipment and refinancing for existing homes.
Refinancing has been on fire since early 2020, when mortgage interest rates continued on a steep downward slope toward 2%. Mortgage Bankers Association survey data shows that Florida refinance applications were up 52% in 2019 – and up 118% in 2020.
For those who own a home and qualified, millions of people took notice and jumped in. From the first quarter of 2020, when the average rate on a 30-year fixed-rate mortgage was 3.5%, to the second quarter, when rates fell to 3.13%, refinance lending jumped more than 60%. And compared with the same time last year, refinance activity spiked by an astounding 200%.
Fannie Mae recently recalibrated its forecast for refinance activity in 2020 to $2.4 trillion, which is $350 billion more than what the government-backed mortgage entity predicted at the end of last summer.
What does this mean for a borrower? Let’s consider a fictitious Florida family of five who purchased a median-priced home in late 2018 for $255,000. Interest rates then were relatively high, around 4.9% for a 30-year fixed rate mortgage with a 20% down payment. Under those terms, their monthly payment for principal and interest only would be $1,078 per month.
But if they refinance now at 2.7%, their monthly payment would go down by $253 per month, or $3,036 per year. This, plus the ability to skip a payment while the loan is being restructured puts an extra month’s mortgage payment in this family’s savings account. Note: Credit scores (minimum 720), equity (20%+) and other things often apply to qualify for a refinance.
Depending on a homeowner’s income eligibility, the amount saved is about comparable to the first round of stimulus checks. But the difference between the direct check from Uncle Sam and a mortgage refinance is it that a refinance is a gift that keeps on giving, year after year, long after the effects of the pandemic are behind us.
Of course, there are costs associated with completing a refinance transaction, and the interest rate the family is financing from matters greatly. Anything less than a 0.75% reduction may not be worth it, so it’s important that the borrower knows the intricacies of the deal.
While refinancing is a great boon for a homeowner’s bottom line right now, there are other caveats to note. Refinancing to get a better rate, without cashing out on equity, will ensure the homeowner isn’t in danger of going underwater if prices fall in the future. The homeowner should also plan on being in their home for 5-7 years to allow enough time to absorb the closing costs of the transaction.
And it is worth noting that there may be an unintended consequence of all this refinancing: continued inventory shortages. As people lock in low rates today, they are less likely to sell and buy something new when the interest rate environment is less favorable. This could lead to some paralysis in certain sectors of the market.
Still, the unlocked money that comes from refinancing is an under-appreciated source of stimulus to American homeowners able to free up funds and take care of other needs, not only now but for years to come.
Jennifer Quinn is an economist and Director of Economic Development
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