Many Homeowners Are Rushing to Refinance Their Mortgages. Should You?
Lower mortgage rates are leading to an uptick in refinances. But should you get a new mortgage now? Read on to find out.
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If you signed your mortgage in the past couple of years, you may have done so grudgingly. Mortgage rates have been elevated since they started climbing in 2022. And given that mortgage rates fell to record lows in 2020 and 2021, recent borrowing rates have been a tough blow for home buyers.
The good news is that if you're unhappy with the mortgage rate you initially locked in, you're not stuck with it forever. You could refinance your mortgage and lower its interest rate. And it appears as though many homeowners are suddenly going this route.
For the week ending Sept. 20, mortgage applications increased 11% from the previous week, according to the Mortgage Bankers Association. Refinance applications, meanwhile, rose 20% from the previous week and jumped to their highest level since July 2022.
Given this trend, you may be eager to hop on the refinance bandwagon. But here's why you may want to wait a bit longer to swap your existing mortgage for a new one.
Mortgage rates are expected to continue falling
On Sept. 19, the average 30-year mortgage rate fell to 6.09%, the lowest average rate since February 2023. And it's not a coincidence it happened right after the Federal Reserve made its first long-awaited federal funds rate cut on Sept. 18.
To be fair, mortgage rates started falling before the Fed's rate cut. And mortgage rates are influenced by a number of factors, the Fed's benchmark interest rate being just one of them.
But in the coming months, the Fed is expected to continue cutting interest rates to reverse the numerous hikes it implemented in 2022 and 2023. The Fed is able to lower its benchmark interest rate because inflation has been slowing steadily. As the Fed moves forward with rate cuts, borrowing rates across the board are likely to come down, mortgage rates included.
For this reason, you may want to wait for a few more rate cuts from the Fed before you refinance your mortgage. If you sit tight until early 2025, for example, you may find that you're able to snag a considerably lower rate on a new mortgage than you can today.
Should you refinance?
As a general rule, it pays to refinance a mortgage when you can shave about 1 percentage point or more off of your loan's interest rate. So if you signed your mortgage at 6.59% and rates are sitting at 6.09%, that may not be enough savings to warrant a refinance. But if you locked in a mortgage at 7.19%, refinancing makes more sense -- and it could save you a nice amount of money.
One thing to remember about refinancing, though, is that it's not free. You're charged closing costs to refinance a mortgage the same way those fees apply when you put an original mortgage in place.
Closing costs can amount to 2% to 5% of your mortgage amount. For a $300,000 loan, you're looking at $6,000 to $15,000.
That's why you want to make sure you're getting a considerably lower interest rate when refinancing. You want your monthly savings on your mortgage payments to be substantial enough to justify your closing costs.
How much longer do you plan to stay in your current home?
You also need to ask yourself whether you plan to stay in your home long enough to recoup closing costs on a refinance. Say you pay $6,000 to put a new loan in place that leads to $250 in monthly savings. It will take 24 months to break even on that $6,000 expense.
If you think you'll move in two years or less, a refinance won't do you any good. But if you're convinced you'll stay in your home for at least five more years, then in this situation, refinancing does make sense.
It's easy to see why so many homeowners are rushing to refinance today. But as tempting as that may be, an even better move could be to sit tight a bit longer and wait for rates to drop further.
If you can lock in a new mortgage at under 5%, you stand to enjoy even more savings on your monthly payments. If you're managing your current payments reasonably well, then you might as well wait a few more months and see where rates land.
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