Mortgage rates haven’t been this attractive in over a year, but there’s good news for homeowners looking to refinance.
Many homeowners are already jumping at the chance to lower their monthly payments, leading to a surge in mortgage refinancing applications.
That was before the average rate on a 30-year mortgage fell to 6.2% last week, down from an average of 7.22% in May, according to mortgage buyer Freddie Mac, and is now at a 19-month low.
The rush to refinance is justified, as even a small drop in mortgage rates can translate into big savings in the long run. For a home with a median U.S. listed price of $422,600, a buyer who put down a 20% down payment at last week’s average mortgage rate would save $360 a month compared to what it would have cost to buy the same home in October, when the average interest rate was in effect. Rates hit a 23-year high of 7.79%.
Still, there’s more to consider than just mortgage rates: Refinancing can cost thousands of dollars, and you can’t always roll all the fees into your new loan.
Depending on the difference between your current and new interest rates, it could take months or years to break even on the costs of refinancing, so if you plan on selling your home before then, refinancing might not make sense.
There are a few important factors to consider when considering whether now is the right time to refinance your mortgage.
Are the rates attractive enough to make refinancing worthwhile?
Although mortgage rates are falling, the average rate on a 30-year mortgage is still more than double what it was just three years ago.
According to Realtor.com, about 86% of all mortgage balances have interest rates below 6%, and more than three-quarters have rates below 5%. If your mortgage rate falls in that range, you should make sure you can refinance to a rate significantly lower than your current one.
One rule of thumb to consider is whether they can cut interest rates by between half a percentage point and three-quarters of a percentage point, said Greg McBride, chief financial analyst at Bankrate.
“That’s when you start thinking about it,” he said.
For example, someone taking out a 30-year mortgage at 7.5% or 8% should ensure their interest rate is in the low 6% range.
Homeowners with adjustable-rate mortgages (ARMs) that are scheduled to adjust to higher interest rates may also want to consider refinancing while rates are lower.
How long will it take to break even on refinancing costs?
The break-even period for refinancing a mortgage is shorter the larger the savings amount. For example, if you refinance from an 8% interest rate to a 6% interest rate, the break-even period is much shorter than if you refinance from a 6.75% interest rate to a 6.25% interest rate.
Therefore, it’s important to consider how long you plan to live in the home to ensure you can cover the costs of refinancing.
Consider overall and initial costs
Refinancers who focus only on potential savings may be left short by fees, and just because you can roll over many or most of the costs into your new loan usually doesn’t mean the loan is free.
If you roll the costs over to a new loan, you’ll either take on a larger balance or pay a slightly higher interest rate to make up for those costs.
There may also be fees that must be paid at closing, such as appraisal fees, title insurance, survey fees and local taxes that are beyond the lender’s control.
Should I wait until interest rates ease further?
Mortgage rates are influenced by several factors, including the bond market’s reaction to the Federal Reserve’s interest rate policy decisions, which could change the trajectory of the 10-year U.S. Treasury yield, which lenders use as a guide for pricing mortgages.
The yield rose above 4.7% in late April but has since fallen sharply in anticipation of a rate cut from the Fed. It was at 3.66% in morning trading on Friday. As bond prices rise, yields fall.
Signs of slowing inflation and a cooling labor market are raising expectations that the Fed will cut its benchmark interest rate for the first time in four years at its policy meeting this week.
Mortgage rates could ease further if bond yields continue to fall in anticipation of the Fed cutting rates multiple times this fall, but most economists expect the average rate on a 30-year mortgage to remain above 6% this year.
One could argue that bond markets are already priced in expectations that the Fed will ease interest rates, meaning mortgage rates may not be able to fall any further than they already have in the coming months.
If you’re on the fence about whether you should refinance now or hold off to get a lower interest rate, we recommend that you at least be prepared and talk to a lender or shop around so that you’re ready to act quickly when you’re sure to get a competitive rate.
“Mortgage rates appear to be trending downwards, but rates can change suddenly, so it pays to jump on an opportunity if it arises,” McBride said.
Veiga is a contributor to The Associated Press.
