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It's unclear when the Fed could start lowering interest rates, but many homeowners who took out mortgages in recent years — where interest rates have ranged between 6% and 7%, and even touched 8% — are paying attention to opportunities to lower interest rates. interest rates. Refinancing.
Thanks to higher mortgage interest rates, refinancing activity in 2023 was at its lowest level in 30 years.
In the first and second quarters of 2023, there were just $75 billion and $80 billion, respectively, in mortgage refinancings nationwide, according to Freddie Mac, a government-sponsored entity that buys mortgages from banks.
“Because interest rates have risen so much over the past few years, refinancing activity has mostly disappeared,” said Jeff Ostrovsky, a housing analyst at Bankrate.
Freddie Mac found that refinancing activity rose 2.9% in February compared to a year ago. However, fewer owners may refinance their loans because they may still be restricted by historically low interest rates or may see little incentive to do so, as mortgage buyers would expect.
As homeowners wait to find out when the Fed's interest rate cuts may be implemented, and to what extent, here are three signs that it may be smart to refinance:
1. You can lower your interest rate by 50 basis points or more
The right time to refinance your loan depends on when you bought your home, said Chen Zhao, chief economist at real estate brokerage Redfin.
Experts say it's usually smart to wait until rates drop by a full percentage point, because that makes a big difference to your mortgage.
However, once you start seeing interest rates fall at least 50 basis points below your current interest rate, contact your lenders or loan officers to see if it makes sense to refinance, depending on factors including costs, monthly savings, and the term you plan to refinance. Zhao said at home.
“There are costs associated with this, but the costs are low compared to the long-term savings,” Zhao said.
While expectations for Fed rate cuts continue to change, interest rates are unlikely to fall much below 6% in the near term, Zhao said.
“We are in a much higher position for interest rates on the economy,” she said.
Don't wait for a rock-bottom rate like those consumers saw in the early stages of the COVID-19 pandemic.
“We're used to mortgage rates as a baseline of 2% or 3%,” said Veronica Fuentes, a certified financial planner at Northwestern Mutual. “This is what we expect from Al Qaeda, but this is not the case in reality.”
2. You can pay cash to cover closing costs
“When you refinance, it's like getting a brand new loan again,” Ostrowski said.
This means you will bear the closing costs, usually including the appraisal and title insurance.
The total cost depends on your region or state.
The average closing cost for a single-family refinanced mortgage was $2,375 in 2021, up 3.8%, or $88, from $2,287 a year earlier, according to CoreLogic's ClosingCorp, a residential real estate closing cost data provider.
Refinancing can make more financial sense if you are able to pay these costs up front rather than shifting the expenses to your new loan. Some lenders may charge a higher interest rate if you finance closing costs, plus you'll pay interest on those expenses for the life of your mortgage.
“You have to be very conscious and have a good strategy about how much money you're going to save and whether it makes sense,” Ostrowski said.
3. You purchased your home with an FHA loan.
If you purchased your home with an FHA loan, you may have a reason to refinance. While such loans are a “great tool” to secure a home as a first-time buyer, there is a required mortgage insurance premium, or MIP, that can be expensive, Ostrowski said. Most new borrowers pay an annual MIP equivalent to 0.55% of their loan, according to government figures.
“If you get an FHA loan, it might make sense to refinance at a slightly lower rate only if you'll be able to eliminate your mortgage insurance premium,” he said.
For example, on a $328,100 mortgage, the owner would pay annual payments at 0.55% for the life of the loan, which equates to $150 per month, according to Bankrate's calculations.
