Refinancing your home can be a strategic move, offering numerous benefits such as lowering your monthly mortgage payments, tapping into your home’s equity, or even eliminating private mortgage insurance (PMI). With the Fed expected to cut rates in just a few short weeks, it is likely that many recent homebuyers will be weighing their options when it comes to refinancing. However, navigating the refinancing process requires a clear understanding of your mortgage options, current market conditions, and a strong partnership with your real estate attorney. In this legal blog post, we will explore these aspects in detail, particularly in the context of current interest rates and the broader economic environment.
When considering refinancing, homeowners typically have several options:
This involves replacing your current mortgage with a new one that has a different interest rate or term. In this type of refinance, you completely wipe out your old loan and replace it with a new one. This results in a brand-new loan amount, terms, interest rate, and duration. For instance, if you have a 30-year fixed-rate mortgage at 5% interest, refinancing to a 15-year loan at 3.5% can significantly reduce your monthly payment and the amount that you will pay the bank in interest over the remaining life of the loan. With this type of refinance, you cannot withdraw any money, or equity, from your home and are only adjusting the terms. With rates currently hovering around 6.5% and having already exceeded 7% not too long ago, this would be a very popular refinance option for those who purchased their home within the last 1-3 years if rates do drop below 6% in the near future.
This type of loan allows you to borrow against the equity in your home, converting part of it into cash. You don’t have to wait until you completely pay off your loan or sell the property to tap into any appreciation in value of your home resulting in an increase in equity. This type of refinance allows you to convert that equity into cash. For example, if your home is valued at $400,000 and you owe $200,000, you could refinance for $250,000, receiving $50,000 in cash. This option is particularly useful for those looking to leverage their home’s equity for things like home improvements, debt consolidation, or other significant expenses like college tuition or savings.
If you currently pay PMI and have built up enough equity, refinancing can help you eliminate this insurance. For most, PMI is an unwanted and unnecessary expense since it does nothing to protect you, the homeowner, and instead protects the bank’s loan. For many homebuyers on the South Shore of Massachusetts that purchased within the last few years, there is a strong likelihood that the value of your home has appreciated depending on when you purchased, how long you have owned the home, and any improvements that you have done to the property.
Take for instance a simple example that in today’s market would not be all that uncommon. Mike and Sally purchased a home in 2022 for $500,000 but could only put down $25,000 (5% of the purchase price). Since their down payment was less than 20%, they now pay roughly $150 in PMI every month to the bank. Fast forward to present day, and after some minor structural improvements and energy efficiency upgrades, combined with the overall rise in prices of homes on the South Shore in part due to a limited demand and higher interest rates, their home is now appraised at $600,000. Now, on top of the equity they have gained each month simply from making their mortgage payment, they have gained $100,000 in equity just from the appreciation in value of their home.
In just two years they went from having 5% equity in the home (the original $25,000 down payment at the time of the purchase) to just under 21% or $125,000 in equity (the $25,000 down payment plus the $100,000 in appreciation). Now if they were to refinance or request a new appraisal from their bank that owns the loan, they would exceed the 20% equity requirement which accompanies their PMI and would be able to remove this unnecessary payment, saving them $150 per month which is almost $2,000 in savings per year. What many smart homeowners will do is then take these new savings, and contribute them directly to the principal on top of their new monthly mortgage payment. This allows them to gain more equity in their home even faster, limit the amount of interest they will pay over the course of the new loan, and ultimately payoff their mortgage well before the actual 15 or 30-year loan expires.
As of now, mortgage rates have seen significant fluctuations, influenced by broader economic factors such as inflation and Federal Reserve policies. All eyes have been on the Federal Reserve and where they set the federal funds rate, which is the interest rate at which depository institutions (like banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis. This rate is important because it serves as a benchmark for many other interest rates, one of which is mortgage rates. High interest rates can make refinancing seem less attractive because they increase your borrowing costs. For example, if you originally secured a 30-year mortgage at 4%, but current rates are at 7%, the new loan’s higher rate could offset the benefits of refinancing.
This is where Massachusetts has seen broad reaching implications with a limited supply of houses. Many homeowners either purchased or refinanced during the COVID-19 Pandemic, securing rates as low as 2-3%. As a result, these homeowners are reluctant to sell their homes despite the rapid increase in home values because they don’t want to give up their low rates and subsequently their lower monthly payments. The housing market is simply supply and demand, and with these owners being content with their low rates, they are reluctant to sell or refinance since their rate would increase substantially. And because demand has been rapidly rising, especially in the Greater Boston Area and the South Shore, prices are increasing as a direct result of high demand with low supply.
However, it’s important to consider the long-term implications. If interest rates drop in the near future, refinancing could become highly advantageous. With even small decreases in rates over time, this will lure some of the current homeowners from the sidelines where they will decide to sell their homes and search for a new one. For instance, refinancing a $300,000 mortgage at 5% interest versus 7% could save you thousands annually. Speaking of sidelines, lower rates will also get many potential buyers off the bench and back in the game as they search for a new home or their first home. With rates as high as they have been, many potential buyers have resorted to renting as they wait for rates to come back down. With both rates and prices being as high as they are, it has been especially difficult for first time homebuyers to be able to afford anything in Massachusetts. In an election year the markets can be especially unpredictable, but if rates do make their way down alongside inflation, it will have a big impact on the housing market in Massachusetts. Lower rates will make housing more affordable for buyers, increase the supply of homes, while also normalizing sale prices overall.
For perspective where the market is at currently, the median single-family home price in Massachusetts in June 2024 was $665,000 (a new all-time high) compared to $615,000 in June of 2023, an increase of over just over 8% year-over-year. In Greater Boston this number is even more daunting. With the median single-family home price coming in at $835,000 in June 2024 compared to $770,000 in June 2023, an increase of 8.4%. The caveat to sales prices continuing to jump year over year is the number of actual transactions that are occurring. While sales prices jump, the number of actual sales is down. In June 2024 there were 4,441 sales compared to 4,876 in June 2023, a decrease of -8.9%. It is a similar story when you zoom in just on Greater Boston, with 2,341 sales in June 2024 compared to 2,496 in June 2023, a -6.2% decrease. This discrepancy highlights the aforementioned supply and demand problem that buyers and sellers are facing across Massachusetts in today’s housing market.
*Current housing data sourced from the Warren Group.
Navigating the refinancing process can be complex, and having a knowledgeable real estate attorney on your side is invaluable. Here’s how our attorneys at Lane, Lane & Kelly can assist you:
Our attorneys help to “quarterback” the entire transaction from the moment you contact to us to the time you sign your new loan documents. We partner closely with your lender to ensure all documentation is correctly handled and all deadlines are met, streamlining the process and minimizing delays.
We meticulously review all refinancing documents, ensuring that terms are favorable and that you understand all aspects of the agreement. We also examine the title to the property (if needed) and can help you file a declaration of homestead if you have not already. For a thorough overview of what a declaration of Homestead is, you can read our legal blog here. Having a knowledgeable real estate attorney representing you is crucial in understanding your loan documents, timeline, and getting all documents signed in a timely fashion.
Our team manages the closing process, ensuring that all legal requirements are met and that the transfer of the mortgage is smooth and legally sound. We also work with the bank to discharge your previous mortgage and any other encumbrances on the property. This includes verifying the title, resolving any potential issues, and ensuring compliance with state and federal regulations. It is imperative that you have a knowledgeable real estate attorney in your corner to represent your best interests throughout the refinancing process. What many borrowers don’t realize is that they can utilize any real estate attorney of their choosing to conduct the closing. While many banks will recommend that you use their own closing attorney, you do not have to. What you must remember is that the bank's closing attorney represents the bank, not you, the borrower. Just like you have the right to choose your own real estate broker or the bank that will refinance your loan, you can pick any real estate closing attorney that you wish. Make sure you choose the right real estate attorney that understands your needs and is committed to representing your best interests throughout the transaction.
Refinancing your home can be a powerful financial strategy, offering opportunities to lower your mortgage rate, eliminate PMI, or access your home’s equity. While current interest rates may present challenges, staying informed about market trends and working with experienced professionals can help you make the best decision for your financial future.
At Lane, Lane & Kelly, we are committed to guiding you through every step of the refinancing process, ensuring that you have the proper guidance in making the best possible decisions for you and your family to achieve your financial goals. Contact us today to schedule a consultation and explore how refinancing can benefit you.
This blog is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By reading this blog you understand that there is no attorney client relationship between you and Lane, Lane & Kelly, LLP.