Should you refinance your mortgage during the COVID-19 crisis?

While much of the U.S. economy is suffering during the COVID-19 pandemic, the housing market is currently vibrating with energy. Homebuyers and homeowners are rushing to take out new mortgages and refinance existing ones as interest rates remain historically low.

"I feel like I'm selling war bonds," says Julee Felsman, senior vice president of mortgage lending at Guaranteed Rate in Portland, Ore. "It was your patriotic effort in the '40s to buy war bonds. A lot of economic activity happens around housing, so giving that some juice is going to help with the recovery from the negative impacts of COVID."

It may be a stretch to call refinancing right now a "patriotic duty," but it still may be a good idea for a variety of reasons.

How has COVID-19 affected the housing market?

The pandemic's main impact on the housing market has been to boost activity to almost maniacal levels after the Federal Reserve drove interest rates down.

"Contrary to what many analysts expected earlier in the year, the housing market has held up reasonably well during the first months of the pandemic," says Andrew Schrage, co-founder and CEO of Money Crashers. "That's due to a variety of factors, two of the biggest being low-interest rates in general and readily available credit for well-qualified borrowers."

The combination has caused a burst of energy in the sector that is one of the few bright spots in our otherwise woeful economic situation.

"We are, as an industry, running at two to three times the normal capacity of loans," Felsman says. "For the first few months, we were working on adrenaline and treating it like a sprint, but it's turned into a marathon. We have to give priority to folks buying homes, and, on the side, we need to juggle getting as many people to refinance as we can. We are absolutely at maximum—beyond maximum."

Despite this pressure-cooker environment, potential refinancers shouldn't hesitate to jump in.

Should you refinance?

Low interest rates provide a strong incentive to refinance right now. The rates are so low, in fact, that many mortgage borrowers would benefit.

"While every homeowner's situation is different and refinancing certainly isn't a decision to take lightly, right now is a very good time for most homeowners to consider taking this step with mortgage rates near historic lows," Schrage says. "Given the dollar amounts at play, even for owners of modestly valued homes, refinancing is one of the most reliable and impactful ways to take advantage of low-interest rates."

That being said, Felsman emphasizes that borrowers should gain clarity about their goals before pursuing a refi. She offers her clients a list of questions in response to inquiries about whether they should refinance, including:

• Are you shooting for a lower payment?
• Are you looking for a shorter loan term?
• How long do you want to keep the loan?
• How much can you pay monthly?
• Do you want any cashback?
• What are your credit scores?
• What is the estimated market value of your home?

These questions are necessary because a cost-benefit analysis goes into every refinancing. For example, if a borrower only has a few more years on their mortgage, it would be difficult for any amount of interest-rate reduction to make up for the fees they'd expend in refinancing.

"The longer you anticipate keeping your loan, the more likely it is to make sense," Felsman says. "I've talked to people who I can save more than 2% but it's not worth it. And I've talked to others who I can only save 0.5%, and it'll pay for itself in 18 months."

Challenges in the time of COVID-19

One challenging factor during the pandemic is that borrowers must have stable, gainful employment to qualify for a new loan. Many don't have that anymore.

Those who do qualify may find that loan guidelines have gotten more restrictive. Lenders have to consider the risk of default, which is difficult when we face so many unknowns.

The process is also taking longer than it used to. While a refinance takes typically 30 to 45 days, Felsman sees them averaging 60 to 90 days right now. Lenders who are overwhelmed with requests and looking to throttle their volume may decide to charge more by increasing interest rates.

Despite all these challenges, many homeowners qualify for refinancing and are eagerly pursuing it to get low rates. They know they need to act fast, as the opportunity may be gone just as suddenly as it appeared.