May 2022

Mortgage Purchase and Refinance: Before and After COVID

Results for - May 2022

It’s been a wild ride for US mortgages since COVID-19 became an international crisis in early 2020. Since then, mortgage interest rates in the USA hit record lows, there’s been intense competition between buyers for homes, and not enough homes to keep up with the demand. Some of these changes can be attributed to the following events and circumstances: 

  • More Americans are now working from home as remote employment becomes more common for companies across the world. With that flexibility, more people may have the flexibility to move, live where they want, and invest more in their home where they now spend more time.
  • Supply chain complexities continue to be a prevalent issue for the housing market, constraining the economy. Supplies for the housing market hit record lows, unable to keep up with the demand. These issues persisted throughout 2021 and are expected to spill over in 2022, according to Fannie Mae.

 

  • While unemployment is diminishing, according to the U.S. Bureau of Labor (BLS), unemployment rates shot up from 4.4% in March 2020 to nearly 15% in April 2020. Unemployment rates did not drop below 5% until September 2021. As of November 2021, however, BLS announced that the unemployment rate dropped by 0.2 percentage points down to 4.6%, and that “job growth was widespread.”
  • The Federal Reserve began purchasing mortgage-backed securities (MBS) in order to keep mortgage rates down for Americans. The organization spent $40 billion a month, effectively keeping mortgage rates at an extremely low rate between 2% to 3%. However, in November, the Federal Reserve committee announced it would be taking steps away from its emergency intervention.

In order to understand the housing market better, Lendstart conducted a survey of 400 Americans regarding the challenges of getting a mortgage, how they went about choosing their mortgage, and their thoughts on refinancing their mortgages. Here’s what we found when it comes to Americans and their mortgages.

 

The Challenges of Taking a Mortgage

Taking out a first mortgage can be a confusing and complicated process, especially if the borrower is unfamiliar with the different types of mortgages, terminology, and terms they must fulfill. 

Many potential home buyers scrimp and save for a down payment, scramble to increase their credit scores, and chase down an affordable home in a limited price range in an extremely competitive market. Even the federal government acknowledges the challenges, like in this piece, “Challenges in Housing and Mortgage Markets” by the U.S. Federal Reserve. Here’s what we found out about the challenges of applying for a mortgage.

Paperwork

According to the survey, the seemingly endless amount of detailed paperwork is the No. 1 challenge most Americans face when applying for a mortgage at 27.5%. Like with any other type of credit, lenders want assurance that borrowers will repay the mortgage if they are lent money. In order to get approved for a mortgage, borrowers have to provide the following paperwork:

• Proof of income and employment — this can be pay stubs, tax returns, and tax forms such as W-2s and 1099s

• Documentation of any debt

• Documentation of any assets

• Proof of rent payments and landlord contact information

• Any court records such as divorce, child support, alimony, or bankruptcy

While some of this paperwork may be easy to attain, some may take some time. Before applying for a loan, borrowers may benefit from doing some research and organizing the paperwork they may need to present in order to get a home loan.

Understanding the Deal

Wrapping one’s head around a six-figure loan can be challenging. Nearly 25% of those who were surveyed reported that understanding the details of their mortgage was the most difficult part of getting a home loan.

Some of the basic aspects of a mortgage deal that are critical to know are that the higher an individual’s credit score is, the better rates they may be eligible for. This can decrease the overall amount they may have to pay for their home. Another basic aspect borrowers will want to be aware of before applying for a mortgage is their debt-to-income ratio, which is the amount of debt a person has compared to their income. This may also impact the rates they are offered.

Other aspects of a mortgage deal include down payments. Consumers will typically need between a 3% to 20% down payment when purchasing a home. This demonstrates to lenders that the individual is willing to invest their money upfront. Keep in mind, if a borrower puts down anything below 20%, they may have higher chances to have to pay for private mortgage insurance (PMI)

Borrowers also need to understand the fees involved with getting a mortgage, and there can be quite a lot. These can include application fees, appraisal fees, inspection fees, title search fees, origination fees, and underwriting fees. Borrowers should consider planning ahead for and researching potential fees, and read over any paperwork before signing. 

Qualifications

Some types of loans may require steep guidelines borrowers will need to meet in order to obtain a mortgage. Twenty percent of survey participants answered that meeting the qualifications for a home loan was hard for them.

While each type of loan has its own set of qualifications borrowers will need to meet, most loans typically require requirements set by Fannie Mae and Freddie Mac. These guidelines include having a certain credit score, a down payment, and a debt-to-income ratio cap. These requirements are also dependent on the type of property a consumer is intending to buy.

For example, a conventional loan usually requires a minimum credit score of 620, a 3% down payment, and a debt-to-income ratio that isn’t above 50% for a primary, secondary, or investment home. This is in stark contrast to a VA loan where requirements are much more relaxed such as zero minimum down payment. 

Understanding the Terminology

When it comes to getting a mortgage, borrowers may get there may be a lot of technical terms thrown at them which can be confusing if consumers are unfamiliar with the meanings, according to 16% of participants in Lendstart’s survey. 

For instance, there are various types of mortgages, some of the most popular being fixed-rate mortgages, variable-rate mortgages, and standard variable-rate mortgages. Each of these types of mortgages has different terms and rates that will play a large role in how much borrowers end up paying for their homes.

Even beyond mortgage types, there are insurance, rate, and fee terminology that many borrowers may not be aware of. Not understanding these details may lead to some borrowers agreeing to terms for a mortgage that doesn’t align well with where they are financial lenders are a few mortgage key terms by Consumer Finance that borrowers may benefit from knowing.

 

Most Popular Mortgage Types in the USA

Just as there are different types of loans and credit cards, mortgages come in various forms as well. While fixed-rate mortgages are among the most common, some homeowners may go with variable rate mortgages or standard variable rate mortgages. 

Each type of mortgage comes with its benefits and disadvantages. Since each homeowner is in a different financial position, the terms of one type of mortgage may be more or less attractive to one homeowner as opposed to another. 

Read on to learn more about each type of mortgage and the various factors borrowers should consider when purchasing a home.

Fixed-Rate Mortgage

During our study, we found that fixed-rate mortgages were the most common choice for homeowners (45%). 

The definition of a fixed-rate mortgage is similar to how it sounds — these types of mortgages come at a locked-in interest rate for the entirety of the loan, no matter the ups and downs of the housing market.

This type of mortgage may be best for homeowners who desire consistency and want to know what to expect to pay month to month. Fixed-rate mortgages may also be an attractive option for homeowners planning to stay at their residence long-term as it may reduce how much they have to pay long term.

Homeowners can get 10, 15, 20, and 30-year fixed-rate mortgages. Thirty-year mortgages are the most popular, followed by 15-year fixed-rate mortgages. Typically, the longer the loan term is, the lower a person’s monthly payments will be. However, on the flip side of that, the shorter a borrower’s loan term, the less they will have to pay in interest. For example, if an individual decides to go with a 30-year fixed-rate mortgage, they will pay more interest than someone who chose a 15-year fixed-rate mortgage, therefore, paying less in the long run.

Variable Rate Mortgage

Variable-rate mortgages were the second most popular type of mortgage, according to Lendstart’s survey, at 13.5%. 

Unlike a fixed-rate mortgage, a variable-rate mortgage does not offer homeowners fixed mortgage rates. This means that the monthly mortgage bill may differ each month as interest rates fluctuate up and down along with the housing market.

Variable-rate mortgages are typically organized to include an indexed rate paired with a variable rate margin. These rates are based on whichever index the lender decides on — this can come from the U.S. Treasury, the London Inter-Bank Offered Rate (LIBOR), or the 11th Federal Home Loan Bank District.

Adjustable-rate mortgages (ARM) are a type of variable-rate mortgages. These types of mortgages can be organized as a hybrid of fixed and variable rates. For example, one form of an ARM mortgage is a 7/1 ARM. With this type of loan, the homeowner would pay a fixed-variable rate for seven years, then pay a variable rate that adjusts every year (indicated by the number one). Other types of ARM mortgages lenders may offer include 5/1 ARM (five years fixed rate then an annually adjusted rate for the remainder of the mortgage — these are the most common type of ARMs) and 2/28 ARM (two years with a fixed-mortgage rate followed by 28 years of variable rates).

Standard Variable Rate Mortgage

The third most popular type of mortgage claimed on Lendstart’s survey was standard variable-rate mortgages (SVR) at 12.25%. 

A mortgage with SVRs is a type of home loan where a borrower’s interest rate is determined by their lender after their initial mortgage’s conditions have expired and the borrower didn’t renew. 

Here’s an example of how this may work: Let’s say a borrower takes out a five-year mortgage with fixed rates. After those five years are up, if the borrower doesn’t renew, instead of having those lock-in fixed rates they were initially offered, those rates will instead be set by the lender. 

Unfortunately, if this is the case, the homeowner may pay a lot more than their original fixed rate as SVRs are often set at a much higher rate than fixed-rate mortgages. Because SVRs are variable, the lender can also change the rate whenever it chooses. If a lender decides to increase its rates, this means that the borrower’s monthly mortgage payments may go up.

If a consumer wishes to avoid being placed on an SVR mortgage, it is recommended to be sure to track when their mortgage deal ends and their search for a new mortgage beforehand.

Other Types of Mortgage

Other types of mortgages also listed in Lendstart’s survey included the following:

Discount mortgage: A little more than 6% of survey respondents claimed they had discount mortgages. This type of mortgage ties in with standard variable-rate mortgages as borrowers with this type of mortgage pay SVRs with their lender. However, unlike regular SVR mortgages, homeowners with this type of mortgage pay lower rates than the lender’s standard SVRs for either the entirety of their home loan or a determined period of time.

Tracker mortgage: Only 2.5% of those surveyed reported having a tracker mortgage. This type of home loan is a form of a variable-rate mortgage. Tracker mortgages typically follow an economic index, such as a federal funds rate, as a base rate. The tracker mortgage rate is set to be above the base rate and fluctuates along with it. Therefore, when the base rate changes, so will the borrower’s mortgage rate.

Capped-rate mortgage: This type of mortgage was not far behind tracker mortgages, at 3%. Capped-rate mortgages are a type of variable-rate mortgages; however, unlike variable-rate mortgages, capped-rate mortgage interests cannot surpass a certain interest limit.

Offset mortgage: Offset mortgages were the least common type of mortgage at 1.75%, according to Lendstart’s survey. Offset mortgages are a type of mortgage that allows borrowers to lower their interest payments as long as they invest saving deposits with the lender.

16% of Americans Don’t Know What Mortgage They Have

Nearly 70% of those surveyed reported they had a mortgage with fixed-rate mortgages being, by far, the most common at 45%. During Lendstart’s research, however, we found that the second most popular answer was that borrowers weren’t sure what type of mortgage they have followed by 13.5% of those surveyed stating they had a variable rate. Sixteen percent of Americans claimed they don’t know which type of mortgage they have. A lack of financial awareness and knowledge can make the process of obtaining and managing a mortgage that much more difficult. Unfortunately, it’s not uncommon for people to feel they have a lot to learn when it comes to their finances.

According to the National Foundation for Credit Counseling (NFCC) 2020 Consumer Financial Literacy Survey, one in ten Americans are “not very” or “not at all” confident when it comes to personal finance. Three out of four people living in the U.S. believe that they would benefit from the advice of a financial expert.

Taking the time to learn more about personal finances as well as develop a general understanding of subjects such as mortgages, loans, and credit cards can help borrowers to make more informed financial decisions.

How Do Americans Choose Their Mortgage Lender?

While finding a new home can be exciting, the process of choosing a mortgage lender can feel a bit intimidating to take on. There are many factors that borrowers have to weigh that will not only save them the most money in the long run but also align with what they can afford upfront. While the most common determiners are interest rates and monthly payment amounts, even good or bad customer service can go a long way in helping borrowers decide.

During Lendstart’s study, we asked participants what led them to choose their mortgage lender. Here’s what they shared.

Interest Rate

When it came to choosing a lender, 47.5% of survey respondents answered that the company with the lowest interest rates was their No. 1 choice. This was applicable to most people, no matter what their credit standing was. This may be because interest rates determine how much a borrower will end up paying overall.

Interest rates are the amount a lender charges borrowers for the loans they receive. It is typically charged as a percentage of the total loan a consumer takes out. The higher the percentage, the more the borrower will have to repay the lender. Considering borrowers are taking out six-figure loans, a lower interest rate can save a new homeowner thousands of dollars.

For example, a potential homeowner takes out a $320,000 30-year fixed-rate mortgage loan at 3.34%. This means that their monthly payments would come out to $1,409, and the borrower would end up paying $187,066 in interest to their lender over the life of the loan. All in all, the borrower will end up paying their lender $507,066 for their home.

In a different scenario, a borrower takes out a $320,000 30-year fixed-rate mortgage loan at 2.25%. The borrower would pay $1,223 a month for their mortgage and, overall, end up paying $120,348 in interest. The grand total would come to $440,348 — that’s $66,718 less than the borrower with the 3.34% interest rates.

Monthly Installments

For some respondents, 19.75% to be exact, how much they would pay in monthly installment mattered most to them, especially those with poor, fair, and good credit. Monthly installments are the number of money borrowers will have to pay their lender each month in order to repay their home loan.

Because the lowest interest rates a lender has to offer typically go to those with excellent credit, those with poor, fair, and even good credit may not qualify for a lender’s lowest rates a lender has to offer. This means that these borrowers may pay larger monthly installments than those with excellent credit.

A borrower’s monthly installments are calculated based on the type of mortgage a borrower has. If a borrower has a fixed-rate mortgage, their monthly payments will be the same amount each month. If the borrower has a variable-rate mortgage, then the amount owed each month may be different since the rates are not fixed.

Monthly installment payments are typically due on a monthly basis. Borrowers will typically have to pay their mortgage on a specific day each month. The monthly installments are typically applied to both the principal and the interest of the loan. 

Before agreeing to a mortgage, borrowers should consider working out a budget to determine how much in monthly installments they can afford. Borrowers can use a mortgage calculator to estimate what their monthly installments may look as well as figure out how much house they can afford.

Customer Service

Almost as popular as monthly installments, 19.25% of those surveyed said they chose their mortgage lender based on customer service, the one-on-one experience a person buying a good or service has with a representative of the organization they are making the purchase from. Good customer service can generate not only good reviews and customer satisfaction, but can also convince customers to return for more business or recommend that company to others. 

Most of the people that chose customer service had either very good or excellent credit. Those with good, fair, and poor credit scores ranked customer service as a much lower consideration when choosing a lender for a home loan.

This may be because those with very good or excellent credit are getting some of the best rates from lenders so they’re able to focus their decision on other factors such as customer service. 

Broken down by credit scores, here’s how customers fared within each credit bracket:

• People with excellent credit scores were the second most likely to choose customer service as their No. 1 determinant at 27%.

• Those with very good credit scores were the most likely to choose customer service at 31%.

• Seventeen percent of those with good credit scores chose customer service.

• Those with fair credit scores were the least likely to choose customer service at 7%.

• People with poor credit scores were the second least likely to choose customer service at 10%.

 

Do Credit Scores Change the Way Americans Choose Mortgages?

Credit scores can play a large role in how Americans approach mortgages. This is because a borrower’s credit score can determine whether they are approved or not for a home loan as well as what kind of rates they are offered. 

If a borrower’s credit score is good or excellent — considered to be a 670 FICO score or higher — they’ll typically be eligible for a lender’s lowest credit scores, and thus avoid paying thousands of dollars more for their mortgage. However, if a credit score is in need of improvement (typically if a borrower is in the fair or poor credit range), borrowers may be offered higher interest rates, if they are even approved for a loan.

Before applying for a mortgage, in order to obtain low-interest rates for a home loan, borrowers may want to consider working on their credit score if it is within the fair (300-579) or poor (580-669) credit range for FICO, or a VantageScore credit score of very poor (300-549), poor (550-649), or fair (650-699). By making sure they avoid making late payments — which makes up 35% of determining a credit score — and paying off other debts — which makes up 30% — borrowers can improve their credit standing.

Keep in mind, however, while credit scores play a large role in how Americans choose their mortgage lender, interest rates were by far the most important factor to borrowers regardless of their credit score, according to Lendstart’s research.

Americans Would Usually Get Mortgages at the Bank

According to Lendstart’s survey, most Americans go with a bank, a private mortgage broker, or credit

union for their mortgage lender. The most popular choice for those looking for a home loan were banks at nearly 53%. Private mortgage brokers were the second most popular at nearly 31%, and credit unions were the third most common at 16.5%.

Many people may prefer going with a bank or credit union because they may already have checking, savings, or other types of accounts with that financial institution. As a result, they may already have a trusted relationship with that lender. For many banks and credit unions, mortgages may be one piece of a whole host of services they offer. Credit unions may be more willing to offer home loans to those with lower credit scores, and may also be less likely to sell a mortgage to a different lender. The Federal Deposit Insurance Company (FDIC) audits and oversees banks while the National Credit Union Administration (NCUA) does the same for credit unions.

Some people may be more interested in going with a private mortgage broker because they completely focus on mortgages. Private mortgage brokers, not to be confused with mortgage bankers, connect those looking for a home loan with mortgage lenders. People in these positions try to match borrowers and lenders according to the borrower’s needs and financial position. This can save borrowers a lot of time and may even save them money if the mortgage broker is able to connect them with a lender with low-interest rates. Borrowers who work with a private mortgage broker may have to pay a commission.

Mortgage Refinancing Before and After COVID

With help from The Federal Reserve, U.S. mortgages during the COVID-19 pandemic hit record lows when it came to rates. This inspired many people to not only purchase new homes but to refinance their mortgages, making the housing market incredibly competitive. Here’s what borrowers need to know about refinancing their homes before and after COVID-19.

Mortgage Refinancing Before 2020

According to Lendstart’s poll, nearly 54% of participants stated they attempted to get their home refinanced before 2020 while 37% claimed they did not apply for a mortgage refinance. 

To get a better idea of what refinancing looked like before 2020, we took a look at the Federal Housing Finance Agency (FHFA) January 2019 Refinance Report. In January 2019, the average 30-year fixed-rate mortgage interest rate was 4.46% after dropping from 4.64% in December.

The FHFA report also tracked U.S. mortgages that were refinanced through the Home Affordable Refinance Program (HARP), which is a program that allows qualified homeowners — those with mortgages owned or guaranteed by Freddie Mac or Fannie Mae, are current on their mortgage payments and have no more than one late payment in the last 12 months — to refinance their home. 

In January 2019, 438 homes were refinanced through HARP, bringing the total to 3,494,833 since the program was created. The volume of HARP home refinances was 1% of the total refinance volume. 

One of the qualifications for HARP is that a homeowner’s loan‐to‐value ratio must be greater than 80%. In January, 5% of the loans that were refinanced through HARP had a loan‐to‐value ratio that was higher than 125%. Those with loan‐to‐value ratios greater than 105% made up 21% of HARP loans. 

The refinance report showed that borrowers that refinanced via HARP had a far lower delinquency rate compared to those who were eligible for the program and did not refinance through HARP.

 

Mortgage Refinancing After 2020

Despite a rocky economy, 2020 was a busy year for the housing market, according to Freddie Mac. Though current U.S. mortgage rates began to rise again in 2021, 2020 mortgage interest rates in the USA dipped into record lows. 

Since the COVID-19 pandemic, according to those who took Lendstart’s survey, 49% said they refinanced their homes. More than 41.25% of those who responded to the poll said they did not refinance their home after COVID-19; however, 73% of the survey respondents are considering refinancing their mortgage in the next five years.

One of the reasons for such a competitive housing market was the incredibly low mortgage rates. As a result, the number of mortgage refinances were the highest they had been since 2003. 

According to Freddie Mac, 30-year fixed-rate mortgage rates averaged 3.1% in 2020. This rate was a decline of about 90 basis points from a year earlier. However, in 2020, while mortgage rates dropped, house prices increased year-over-year by 11.6%. To increase their home equity and decrease their monthly payments, homeowners took advantage of the low mortgage rates and refinanced.

During 2020, there was also a rise in repeat refinances. Repeat refinances are home loans that were refinanced at least two times. Over 10% of refinances in 2020 were repeat refinances. This was an increase from 2019 — 7.8%, but still considerably less than 2003’s 16.6%. 

Those who refinanced their first mortgage in late 2020 were able to lower their rates an average of more than 1.25 percentage points. This was the biggest decrease since 2015.

Mortgage Refinancing Plans

As with U.S. mortgages, there are various types of refinancing plans that people can apply for. Here are a few of those options:

Rate-and-term refinancing: This form of refinancing is among the most common. Rate-and-term refinancing is a type of refinancing borrowers can apply for that will replace their original mortgage. This will not only change their rates but their loan terms and monthly payments as well. In order to qualify, borrowers will need to meet certain credit score and debt-to-income ratio requirements as well as have enough equity in their home.

Cash-out refinancing: This type of mortgage refinancing is another common approach. With cash-out refinancing, a homeowner will need to have built-up equity in their home first. A homeowner can then withdraw cash from the home’s equity. Keep in mind that by doing this, monthly payments typically rise as cash-out refinancing will increase the borrower’s loan amount.

Cash-in refinancing: With a cash-in refinance, borrowers can pay their lender a lump sum that will go toward their home’s equity. This will decrease how much they have left on their loan; however, this typically requires a sum of tens of thousands of dollars, so it can be expensive. This may be a good option for homeowners whose home’s market value is greater than the balance left on their mortgage as well as for homeowners who want to get rid of their private mortgage insurance.

Forbearance: If a borrower is struggling financially, they may be eligible for forbearance. In order to receive forbearance, borrowers will need to work with their mortgage provider to either have their mortgage payments reduced or paused while they get back on their feet. Typically, borrowers can do this without getting fined or accruing additional interest. Learn more about forbearance to find out how it can help.

FHFA Fee and Mortgage Refinance

Starting on August 1, 2021, the Federal Housing Finance Agency (FHFA) eliminated the Adverse Market Refinance Fee, removing a barrier for borrowers looking to refinance their homes. The fee was originally implemented to make up for a projected $6 billion in losses because of the COVID-19 pandemic. 

The fee began on December 1, 2020, and charged consumers an extra 0.5% on the total cost of the refinance. However, policies implemented by the FHFA, Fannie Mae, and Freddie Mac — these two agencies are overseen by the FHFA — were successful enough to pull the fee back early.

“The COVID-19 pandemic financially exacerbated America’s affordable housing crisis. Eliminating the Adverse Market Refinance Fee will help families take advantage of the low-rate environment to save more money,” said Sandra L. Thompson, acting director for the FHFA at the time of the announcement. “(This) action furthers FHFA’s priority of supporting affordable housing while simultaneously protecting the safety and soundness of (Fannie Mae and Freddie Mac).”

Even with the fee in place, however, almost 59% of the survey respondents stated that they were willing to refinance their mortgage. (Note: This poll was conducted before the FHFA reform.) While the elimination of the FHFA fee may be good news for consumers, the actual effect of the FHFA on the mortgage market is still unclear, especially since the organization is in the midst of a leadership transition. In June 2021, President Joe Biden removed the former director of the FHFA, Mark Calabria, and temporarily replaced him with Sandra Thompson as acting director. As of November 2021, a permanent replacement for Calabria has not been announced.

 

 

Why Do Americans Apply for a Mortgage Refinance?

The idea of refinancing a mortgage can be a tantalizing option for many Americans, especially as their financial situations evolve. 

Lendstart asked borrowers in a poll what their main motivations for a mortgage refinance were, and many answers pertained to spending less money on their mortgages. The most common answers included lowering interest rates, consolidating high-interest debt, eliminating private mortgage insurance, and prolonging the loan. 

However, some of the responses Lendstart received varied depending on the individual’s credit score as, in some cases, a person’s credit score can impact their financial situation. Here’s what Lendstart learned from consumers looking to refinance.

Lowering the Interest Rate

Borrowers wanting to lower their interest rates was, by far, the top reason for refinancing their home at 45.50%, according to Lendstart’s survey. This was true across all types of credit scores, whether it was poor or excellent. This is how this answer broke down according to credit score:

  • Excellent: 48%
  • Very good: 51%
  • Good: 39%
  • Fair: 42%
  • Poor: 53%

With the exception of those with good or fair credit scores, around half of the participants in each credit bracket chose to lower their interest rate. Roughly 40% of those with good or fair credit scores picked this as their option. 

By lowering their interest rates, borrowers can not only cut down on how much they pay throughout the life of their home loan but can also reduce their monthly payments as well. In order to qualify for lower interest rates, consumers will typically need to have higher credit scores and a history of paying their bills on time in order to prove to the lender they will be able to repay. 

To get approved for lower interest rates for a mortgage refinance, borrowers will want to work on their credit scores. They can do this by cutting down on their current debt as well as making sure they avoid any late payments.

Consolidating High-Interest Debt

Consolidating one’s high-interest loans was the second most popular reason Americans want to refinance their mortgage at 22.25%, according to Lendstart’s poll. This, however, excluded respondents with excellent credit scores. For many borrowers with excellent credit scores, this was the least popular answer.

Here’s how respondents in each credit bracket responded: 

  • Excellent: 12%
  • Very good: 20%
  • Good: 30%
  • Fair: 27%
  • Poor: 16%

Consolidating high-interest debts was most popular among those with good or fair credit, approximately 30% in both categories. After excellent credit scores, poor credit scores were the second least likely to claim this as a reason.

Using a mortgage refinance to pay off high-interest debt may be a good option for some homeowners, especially if they are approved for a low-interest home loan refinance. This money can be applied toward quickly paying off those high-interest loans, consolidating their debts, and helping consumers to focus on paying off their mortgage instead. This approach can ultimately save consumers money by cutting down on the amount of interest a borrower has to pay since many mortgage loans have much lower interest rates than many other types of debt and credit such as personal loans or credit cards.

Eliminating Mortgage Insurance

Wanting to eliminate mortgage insurance was the secondary purpose behind wanting to refinance only among respondents with excellent credit scores. Overall, 11.5% of respondents said this was the reason they would apply for a mortgage refinance. This is how respondents within each credit bracket responded:

  • Excellent: 34%
  • Very good: 13%
  • Good: 11%
  • Fair: 9%
  • Poor: 4%

While less than 13% of those in most other credit brackets, particularly with those with poor credit scores, eliminating mortgage insurance was the answer for roughly one-third of those with excellent credit.Mortgage insurance typically applies to consumers who contribute less than 20% of a down payment toward the purchase of their home as well as those who get FHA and USDA loans. By purchasing mortgage insurance, the risk to the lender is lowered which may help some consumers qualify for home loans they might not have otherwise been approved for. On the downside, however, it may also increase the borrower’s overall costs. This is why some consumers may want to refinance — if the refinance offers them lower rates as well as the opportunity to lose the mortgage insurance, this could save some borrowers a lot of money.

Prolonging the Loan

Prolonging the home loan was the least popular reason to refinance a mortgage. Across all survey participants, only 10.25% chose this as an option, according to Lendstart’s poll. It was the most common among those with excellent, very good, and good credit. Prolonging the loan was extremely unpopular among those with fair and poor credit. Here’s how those who took the survey responded within each credit bracket:

  • Excellent: 12%
  • Very good: 11%
  • Good: 10%
  • Fair: 7%
  • Poor: 4%

Prolonging a home loan might align best with those who are facing a tight budget or financial hardship and need to cut back on how much they spend on their monthly mortgage. For some borrowers, this could lower their monthly payments which might help some consumers better manage their finances. 

A mortgage can be one of the biggest monthly expenses an individual or family can take on. Reducing that amount can make a big difference in some people’s budgets. However, as a downside, not only will those borrowers spend more time paying off their home, by stretching the loan out for even longer, borrowers may increase how much they end up paying overall for the life of the mortgage.

How Do Credit Scores Affect the Reasoning for Mortgage Refinancing?

Credit scores can have a large impact on a person’s financial position. Many lenders view credit scores as a means to evaluate an individual’s creditworthiness and helps the company weigh the risk of lending to the person. It can limit the type of credit a borrower can access and whether or not they even qualify for most types of credit. Credit scores also can determine the rates and terms an individual will receive if they are approved for a loan or other type of credit. 

The same goes for getting a mortgage or refinancing a mortgage, and an individual’s credit score played a large role in their motivation for getting a mortgage refinance. 

• Excellent: Nearly half — 48% — of those with excellent credit scores said the main reason for a mortgage refinance would be to lower interest rates, followed by roughly a third — 34% — who chose to refinance to eliminate mortgage insurance. Unlike the other credit brackets, however, the third most popular option among those with excellent credit was to move into a longer-term loan at 17%. The least popular option among those with excellent credit was to consolidate high interest debt at 12%.

• Very good: More than half (51%) of those with very good credit wanted to refinance in order to reduce their interest rates while a mere 20% wished to refinance to consolidate any debt they had with high interest. Eliminating mortgage insurance was the third choice among those with very good credit at 13%, with moving into a longer-term loan being the least popular at 11%.

• Good: Though it was still the most popular choice, those with good credit scores were the least likely to choose refinancing in order to lower their interest rates at 39% followed closely behind 30% of respondents stating they wanted to consolidate high-interest debt. The third and fourth choices, eliminating mortgage insurance and moving into a longer-term loan, were neck and neck at 11% and 10%, respectively.

• Fair: Individuals with fair credit leaned most heavily toward lowering their monthly interest rates at 42%. This was followed by 27% of those with fair credit scores choosing to refinance in order to consolidate debt with high interest. There’s a large drop in the fair credit bracket between the second and third options. Those that wish to eliminate mortgage insurance made up only 9% of respondents while the least popular option, lengthening the loan term, made up 7%. 

• Poor: Those with poor credit scores were most likely to choose to refinance in order to lower their interest rates at 53%. For the other options, there was a large drop in popularity. Only 16% of respondents chose their reasoning as consolidating high-interest debt while eliminating mortgage insurance and moving into a longer loan term were a tie for last, both at 4%. 

Why Do Americans Avoid Mortgage Refinancing?

While many Americans are interested in refinancing their mortgage, some also find reasons to be cautious of it as well. In fact, between too high of closing costs and not wanting to deal with the trouble of navigating a mortgage refinance, some Americans did not think the process would be worth it at all.

The most popular reason at nearly 25% among those who thought it best to avoid mortgage refinancing was that closing costs and fees are too high. The second most popular reason for not getting a mortgage refinance was a tie between not saving enough money in the refinance and too much paperwork and hassle, both at nearly 20%. Plans to move or pay off the loan soon was the next on the list of reasons why people wanted to steer clear of mortgage refinancing at 14.50%. Unemployment or reduced income that would prevent qualifying followed close behind at 11.50% with low credit scores trailing closely behind at 10%.

Americans Usually Choose Refinancing Their Mortgage at the Bank

When it comes to getting their home refinanced, 54% of the respondents chose to refinance their mortgage at a bank. 

As stated previously, many banks offer a full spectrum of products aside from refinancing such as credit cards, savings accounts, and checking accounts. The reason why banks may be such a popular avenue for mortgage refinances is because many people may want to work with a lending institution they already have a relationship with. They may already trust that company and want to continue doing business with them. 

Oftentimes, however, borrowers will need to meet certain criteria with a bank such as credit score, debt-to-income ratio, and credit history in order to be eligible for a loan.

However, consumers should keep in mind that banks may not offer as many loan options as a mortgage lender might, and tend to have stricter credit restrictions than a mortgage lender. Though, it’s much more likely that if a borrower goes through a bank for a home loan, they’ll work with that same lending institution for the entirety of the loan, whereas a mortgage lender may sell borrowers’ loans to a different lender.

Do Americans Trust Private Mortgage Companies?

Trust Issues

In order for a consumer to want to borrow through a private mortgage company, there must be some level of trust in the lender.

According to Lendstart’s poll, 29% of the survey respondents don’t have any trust issues with private mortgage companies. Lendstart asked survey respondents to rate on a scale of one to 10 whether they trusted private mortgage companies, with 10 representing the highest amount of trust and one the lowest amount. Here’s how the responses broke down:

  • 1: 2.75%
  • 2: 4.25%
  • 3: 3%
  • 4: 5%
  • 5: 8.75%
  • 6: 6.75%
  • 7: 8.50%
  • 8: 19.50%
  • 9: 12.50%
  • 10: 29%

A collective 76.25% of respondents rated their response as a six or above (indicating that they trust private mortgage companies) while 23.75% answered five or below (indicating that they did not trust private mortgage companies). This shows that while most Americans trust private mortgage companies, nearly a quarter of Americans are wary of these types of lenders.

The Most Trusted Lenders

In order to get an idea of which lenders consumers trusted the most, Lendstart polled Americans, asking which lending institutions they felt the most trust toward.

Among those who were surveyed during Lendstart’s research, Quicken Loans was pointed out as the most trusted lender at 41.5%. Wells Fargo was the second most trusted choice at 36.75% while New American Funding was polled as a close third at 36.25%.

Here’s what the respondents had to say:

• AmeriSave: 32.25%

• New American Funding: 36.25%

• Quicken Loans: 41.50%

• Better: 26.25%

• Zillow home loans: 30.25%

• Credible: 24.00%

• LendingTree: 28.75%

• Discover: 27.5%

• Figure: 17%

• Loan Monkey: 19%

• CitiBank: 27%

• NASB: 16.75%

• Chase: 29%

• Connexus: 17.75%

• Alterra: 16.50%

• Prime Lending: 17.75%

• Flagstar: 17.25%

• Navy Federal Credit Union: 24.75%

• Wells Fargo: 36.75%

• None of the above: 11.50%

Some of the country’s largest financial institutions such as Wells Fargo, Chase, Quicken Loans, Zillow, LendingTree, Discover, and CitiBank were among the most trusted, according to the poll results.

To learn more about some of the most popular lender choices, read the “Quicken Loans Lendstart Review” as well as the “New American Lendstart Review.”

The Bottom Line

Whether borrowers are in the market for a mortgage for their first home or looking to refinance their current mortgage, it’s important to shop around and compare offers. This can help consumers get a good idea of what kind of loans are available to them given their credit score, debt-to-credit ratio, credit history, and down payment amount they’re able to save up for. From there, consumers can compare rates, terms, and amounts to see which lender is offering them the best deal which may ultimately save them money. 

Borrowers will also want to evaluate what type of mortgage would be best for them and their financial position. A fixed-rate mortgage will offer consistent monthly payment amounts while variable-rate mortgages will fluctuate up and down along with the rest of the housing market. If down the road consumers find that their current mortgage loan doesn’t work for them any longer — perhaps they are facing financial hardship or are in a place with their credit score where they might qualify for lower rates — borrowers may be able to refinance for a better rate and terms.

Disclaimer:
The content is provided “as is”. The content is not, nor shall it be taken as professional or financial services or advice. We are not a financial institute, insurance broker, or agent.  Your use and reliance on any of the information provided therein should be done solely at your own risk. We highly recommend contact and advise a financial advisor prior to making any financial decision. We will not be responsible for any damages which may occur as a result of your use of the content available therein. We make no guarantee that any information available is true, reliable, or accurate.