There's relief in sight for homeowners who locked in the most expensive mortgage rates in more than 20 years when borrowing costs were at or near their peak last fall.
Hopes are rising for a Federal Reserve interest rate cut at next week's meeting. Rates are already falling. The 10-year Treasury now sports a yield of 3.68%, down a full percentage point from its recent peak of 4.71% in April. And that means mortgage rates are declining, too.
The upside for homeowners who took out fixed-rate 30-year mortgages near last October's peak of 8%? The average cost of a 30-year, fixed-rate home loan is now 6.29%, according to the Mortgage Bankers Association, or MBA. And that's expected to drop further if Wall Street is right and the Fed is just at the start of a rate-cutting campaign. If so, homeowners with pricey mortgages will be able to refinance at lower rates. That would reduce their monthly payment.
"The refinancing window has opened," said Greg McBride, chief financial analyst at Bankrate, a personal finance site that tracks home borrowing costs.
Who Can Refinance?
The opportunity to refinance and save money, though, is limited. It's only for borrowers who took out loans when mortgage rates were near record highs. Homeowners lucky enough to borrow money to buy a home back when rates were 3%, 4% or 5% won't be able to participate just yet.
The average 30-year fixed mortgage rate for refinances is now 6.32%, according to Bankrate. And some lenders are offering rates below 6%. But now's the time for mortgage holders with high rates to consider refinancing.
The upshot: Borrowers with mortgages charging 7% or 8% can refi and save a bundle. "It pays to shop around and see what rates are available now because we're talking about pretty meaningful savings," said McBride.
Here's some math to illustrate the potential cost savings. In July, the median cost of a single-family home was $422,600. So, a buyer who put 20% down would need to get a mortgage of $338,080. The cost of principal and interest at 8% is $2,481 per month on a 30-year loan. But at 6%, the monthly cost shrinks to $2,027. That's a savings of $454 per month or $5,448 a year.
It's no wonder that the refinance market is heating up after going into a deep freeze for the past year. Refinance activity in the week ending Sept. 6 was up 106% (or double) what it was in the same period a year ago, according to the MBA's Refinance Index. Refis accounted for roughly half (46.7%) of all mortgage applications in the most recent weekly period.
"It is a positive development that there are homeowners who can benefit from a refinance as rates continue to move lower," said Joel Kan, deputy chief economist at MBA.
Golden Age Of Refinancing
What's creating the favorable conditions for refinancing opportunities? Falling inflation is the main driver.
In August, the consumer price index, which measures the cost of goods and services, was 2.5% higher than a year ago and edging closer to the Fed's 2% target. The CPI is down from a peak of 9.1% in June 2022. The taming of inflation, coupled with signs of slowing job growth, puts Fed interest cuts back on the table. The central bank's key overnight lending rate — the fed funds rate — sets the level of rates for all sorts of loans, including mortgages.
Currently, the Fed's key rate is pegged at 5.25% to 5.5%. But traders are placing a 85% probability on the Fed cutting rates by a quarter point in September and are pricing in 46% odds that the Fed will cut rates by a full percentage point by year-end.
So, if Wall Street is right, more mortgage savings are on the horizon. And the mortgage refi window will open for even more people.
Is Now The Time To Refinance?
Should you refi now or wait for potentially bigger savings down the road if the Fed cuts as much (or even more) than investors are pricing in? There are two theories.
First, you might refi now and start reaping savings. McBride recommends those with rates of 7% or 8% to take advantage of today's lower rates now. "For somebody with an 8% mortgage, the savings you get at 6% is a bargain," he said. "I wouldn't necessarily pass that up."
The risk of not locking in low rates now is simple: Trying to time any market is difficult. And it's impossible to truly know where rates are headed.
"Nobody has a crystal ball, and it's anyone's guess as to how quickly and how much rates will go down," said Darren Tooley, senior loan officer at Cornerstone Financial Services. Tooley says many of his customers who were waiting to get the very lowest rate end up with less savings on their refi. "I've seen far too many clients pass on a great opportunity to save money," he said.
There's a cost to waiting, adds Tooley. Say you can save $240 per month now by refinancing but are holding out to save an extra $30 or $60 per month. "Every month you wait to save a little extra means you are spending $240 more on your current mortgage," said Tooley, " There is the risk that the lower rate (you're waiting for) could take several months or longer (to materialize)."
Another Refinancing Plan
Another approach is to wait for lower rates to potentially save more.
Since the Fed hasn't even kicked off its rate-cutting cycle yet, it may make more sense to wait until rates are even lower to reap even larger monthly savings, says Jamie Cox, financial advisor and managing partner at Harris Financial Group.
"If you refinance now and the Fed's rate-cutting cycle is (more aggressive than expected), which is very possible, you might have to refi again (a second time)," said Cox. "And that's an expensive proposition you want to avoid."
Cox says to run numbers on a mortgage calculator to find out what your personal sweet spot is in terms of interest rate and cost savings. "What do you want your mortgage payment to be?" Cox said. Once you know that number, then run simulations on a mortgage calculator to see what rate you need to get to the lower monthly payment you want.
Don't Forget The Costs
You must take costs into account. The average refi costs 2% to 5% of the loan amount, according to Bankrate. So if you're borrowing $300,000, doing the refi will cost you anywhere from $6,000 to $15,000. Typical refi costs include mortgage origination fees, appraisal costs, title insurance and closing costs.
"If the primary motivation is to take advantage of potentially lower rates in the future, it may be wise to wait and monitor the interest-rate environment," said Doug Roller, owner and investment advisor representative at Crossroads Financial Group.
The Fed is expected to cut rates in September for the first time since the Covid crisis in March 2020. So waiting just a few weeks to pull the trigger on a refinance might pay off. "(The wait) would essentially be one more mortgage payment," said Chris Berkel, president and investment adviser at AXIS Financial.
In general, the sweet spot to refi is when rates fall anywhere from half a percentage point to a full point below your current rate. But the bigger the spread between your existing rate and the new lower rate, the bigger your savings will be. And the savings will be bigger on larger loans.
What To Consider
If you're thinking of refinancing, consider how long you plan to stay in the home. You want to make sure you're in the home long enough to recoup the costs of refinancing and getting a new mortgage. Shoot for a break-even point that takes two to three years, says Bankrate's McBride.
The biggest benefit of refinancing is you will pay less money each month on your mortgage. And that frees up money for other purposes.
Berkel recommends using the freed-up cash flow to invest in your future. Put more money in your 401(k) and IRAs. Or if you have debt, use the money to pay it off, especially on credit cards that charge sky-high interest, Roller says.
One last piece of advice: If you're planning to refinance, get your money house in order now. That means making sure your credit score is as high as it can be. Also, be sure to pay off debt so lenders view you as a strong candidate to pay your mortgage off every month.
