With the economy in unprecedented territory and the phrase "housing crash" on the lips of economists, mortgage holders have questions. And current homeowners aren't alone: First-time home buyers in search of a new mortgage also have questions on how and when to proceed.
For borrowers (and potential borrowers) in search of answers, we present your most frequently asked mortgage questions—along with the all-important answers.
Our top 12 mortgage questions range from the basics to more complex financial moves, to assist consumers who've been financially affected by the ongoing pandemic. If you have a question we've missed, please drop us a line and tell us your question.
1. Are mortgage rates going down?
It depends on the comparison. Mortgage rates are down from a year ago, but up from a few weeks ago. 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."
“Mortgage interest rates are closely correlated with the 10-year Treasury yield, which has stayed below 1% for much of the last month,” says Bill Banfield, executive vice president of capital markets for Quicken Loans and mortgage platform Rocket Mortgage. "In general, bad economic news is good news for mortgage rates. Mortgage rates will likely stay low as long as the 10-year Treasury yield also remains at its low levels."
2. Why have mortgage rates gone up?
Despite a constant drumbeat of negative economic news, mortgage rates have gone back up after hitting a record low in early March.
We examined this phenomenon in a recent article about the 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 down the stampede.
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.
But even though rates have crept up, there's room for them to fall againwith so much uncertainty in the marketplace.
"We’re in uncharted territory, so you can’t look to history as a guide to what could happen. It's hard to predict how mortgage rates will react," says realtor.com's chief economist, Danielle Hale. "I don't think they'll go up until it's pretty clear we're out of the woods. They might move sideways, or they might go down more slowly."
3. What are mortgage rates today?
Mortgage rates change daily (even hourly), and a number of elements factor in to the rate a borrower locks in. Although many people follow the Federal Reserve’s actions when it slashes or raises the federal funds rate, that doesn’t directly affect mortgage rates.
“You’re not getting [a mortgage] directly from the Fed,” says Mary Bell Carlson, a certified financial planner known as the Chief Financial Mom. “You’re getting it through a service provider, which is a bank or mortgage lender.”
Mortgage rates are influenced by both the federal funds rate and the Treasury bond market. In addition, each lender adds a percentage to the rate to account for various company fees, Carlson says. So even when the federal funds rate is at 0%, you’re not going to find a mortgage that allows you to borrow with zero interest.
The realtor.com mortgage rate finder will give you information on mortgage rates in your area. All you'll need to do is enter your ZIP code and answer questions such as the following:
· If you are looking to buy a new home or refinance
· The type of home you want to buy
· Where you are in the home-buying process
· If you plan to use the home as a primary residence, vacation property, or investment
· Your veteran status
· Whether you're a first-time or repeat home buyer
· Your projected price range and how much you're willing to put as a down payment
· Financial information such as your household gross income, credit score, employment status, and past bankruptcy filings
Once your information is entered, you'll see the latest mortgage rates in your area.
And because each lender is different, it pays to research and shop around.
Carlson advises not to limit yourself when it comes to working with lenders and to look beyond your own bank.
“You absolutely want to do your homework and check around,” says Carlson.
4. Should I refinance my mortgage now?
Mortgage rates are low, and if you secured a mortgage in early 2019, 2018, or 2017, you're likely a solid candidate for a refinance. Be aware, though, a refinance replaces the original loan with a new one and you may have to change lenders.
“It's a great time to take advantage of how far rates have fallen in the last month, and it’s a pretty dramatic decrease, especially for somebody who took out a mortgage 12 to 48 months ago,” says Banfield.
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. You'll need to provide a few critical bits of information to get a well-informed answer:
· Your location
· Original loan amount
· Original loan terms and rate
· Original loan origination date
· The current balance on your mortgage
· Whether or not you want to take out some cash
· New loan terms and rates
· Refinancing costs
· The amount of the new loan you want
The refinance calculator will provide you with an idea of how much you could save, and tell you how long it will take for you to break even. To calculate your break-even point, divide your total refinance costs by the monthly savings you'll reap. For example: If your refinance cost $2,500, and you've knocked $100 off your monthly mortgage payment, your break-even point is 25 months.
“My check [for a refinance] is always: How long are you going to stay in the house? If you’re going to stay there longer than your break-even point, that makes sense for you to refinance; otherwise stay where you're at,” says Robert Parades, a Tampa, FL–based branch manager for Hometown Lenders.
It’s also important to avoid these key refinancing mistakes.
· Assuming that a federal rate of 0% means you can get a 0% mortgage rate (Not true!)
· Jumping on the refinancing trend too late
· Forgetting about the fees associated with refinancing
· Refinancing too much equity out of your home in a time of uncertainty
· Expecting to lock in your lender’s quoted rates and fees ASAP
· Shopping for the right loan for too long
If the calculator shows you could save some money by refinancing and you’re going to stay in your home long enough to break even and then some, make the move sooner rather than later. Rates are creeping back up, and if you're affected by unemployment or a furlough, you likely won’t qualify for a refinance.
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.
“We have had a refinance boom. My team rarely does refinances, and I do maybe one refinance a year. In the last 30 days, I've done 14,” says Parades. “The interest rates probably about a year ago for somebody with decent credit were about 4.5% or 4.7%. With the government buying all of the mortgage-backed securities, it has deflated those rates to as low as 3.25%.”
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 all over 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.
“What I'm telling people right now is, if you cannot pay your mortgage this month it's important to reach out to your mortgage lender and negotiate and talk through it," Carlson advises. "A lot of lenders are offering relief opportunities.”
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 over, 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.
“The worst thing people can do right now is just bury themselves and not do anything. The payments continue to come, and the [lender] has no idea how to help you,” Carlson says. “It’s better to reach out and be proactive rather than reactive.”
If you stop paying and ask for forgiveness months down the road, lenders might not be as willing to help you. Your decision will also affect your credit score, hampering your chances of obtaining any kind of loan in the future.
Carlson says it’s important to prioritize what you can and can’t pay. She adds it’s better to pay secured debt like mortgage and car payments before credit cards.
“If you don't pay your credit card bills, they can't come to your home and repossess your TV. They have no ability to repossess anything or touch your personal property [over missed] credit card payments,” Carlson says. “Whereas, if you don't pay your mortgage lender, they can absolutely come and take your house.”
8. What is a cash-out refinance?
A cash-out refinance is a way to refinance a mortgage and turn some of the equity in your home into cash. This strategy is often 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. Also, a cash-out refinance replaces the first mortgage and doesn't add a second mortgage like a home equity line of credit.
“If you have been paying down your mortgage in timely manner and you've built up enough equity, it's a good time to tap into it,” says Sathi Roy, head of refinance at Better.com. “If someone is a little strapped for cash right now, it’s a perfect option.”
Roy says her company has seen a 150% increase in cash-out refinances since March.
The refinance calculator can help you figure out how monthly payments could change if you choose to employ the cash-out strategy.
9. What is mortgage forbearance?
“Forbearance [is a program] that would allow a temporary period for a borrower to not have to make a contractual monthly payment amount,” says Sara Singhas, director of loan administration for the Mortgage Bankers Association. “You can either pay a lesser amount of your mortgage—or not pay anything at all—for a period 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.
Mortgage forbearance requests shot up 1,270% between the weeks of March 2 and March 16. The association also showed the number of loans in forbearance went from 0.25% of all mortgages to 2.66% from March 2 to April 1.
During a forbearance period, lenders will not charge late fees or penalties, report missed payments to the credit bureaus, or begin foreclosure proceedings.
Lenders use the term "forbearance" interchangeably with "mortgage deferment."
No matter what you call it, don’t let it dissuade you from reaching out to your lender and asking for help. 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.
“The important thing to get across to folks is, if you need help, talk to a servicer because there are absolutely ways that borrowers can get assistance with paying their mortgage payments,” says Singhas.
10. What is a loan modification, and how do I get one?
A loan modification changes the original terms of a mortgage loan. It's different 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.
“It is usually used when a homeowner has unexpected financial hardship that makes it difficult to make their mortgage payment,” Quicken’s Banfield says. “Under normal circumstances, a modification of a mortgage results in an adverse impact to a client’s credit history and credit score.”
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 levers.
“A homeowner can only get a loan modification through their current mortgage servicer, because they must consent to the terms,” Banfield explains. “Every servicer has its own standards for loan modification, and homeowners should contact their servicer to see if they qualify for a loan modification.”
11. Should I get a home equity line of credit?
A home equity line of credit, or HELOC, can help you turn equity you've built up in your home into cash. This financial tool is usually deployed for home improvement projects or updates. In current financial times, people are using HELOCs to pay bills.
“For some people, it’s their go-to option for savings—a lot don’t have other places to turn,” Carlson says. “Our homes are the biggest asset we own ... so it is the asset that we turn to when times are tough.”
You can get a HELOC only if you have equity built up. So if you put 0% 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 is often variable, meaning it will adjust up during the period of the loan. Even though rates are low right now, there are risks associated with a HELOC.
A HELOC is secured debt, and although a HELOC is a lower-cost option to borrow money than credit cards, there are risks.
“If you don’t pay [HELOC] debt, it is tied to your home,” Carlson warns. “You’re adding a risk, because if you can’t pay that home equity line of credit back over time, your home is now at stake.”
12. Where can I find a mortgage calculator?
A mortgage calculator will help you figure out what you can afford and how much you'll need to borrow. Yes, realtor.com has a handy mortgage calculator to guide your way.
The calculator will help estimate your entire monthly house payment—the principle, interest, taxes, homeowners insurance, and private mortgage insurance.
In order to use the tool, you’ll need to know:
· The price of the home you’re considering
· Estimated down payment amount
· Mortgage interest rate
· Loan length
· Veteran status
As you adjust the different numbers, you will 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. To use it, you’ll need to input your information:
· Annual gross income
· Monthly debt
· Down payment amount
· Credit score range
· Veteran status
This calculator provides guidance you'll need to make an informed decision on how much home you can afford. Carlson also recommends running the numbers based on your net income to see the difference—net income is what you actually bring home each paycheck.
“Roughly speaking, if you can get a mortgage payment that is anywhere between a quarter to a third of your net take-home pay, that's the sweet spot,” she says. “Because what that means is, if you have a quarter or a third of your income [for a mortgage], that means you've got two-thirds or three-quarters left to spend on everything else, including car loans, student loans, utilities, and food.”
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