Mortgage interest rates are finally falling, and plenty of homeowners are considering whether now is the right time to refinance.
In September, after the Fed announced a rate adjustment of 50 basis points, interest rates fell to their lowest levels since March 2023, with mortgage rates now hovering between 5.75% and 6.08%.
Experts also believe there will be an additional rate cut later this year, based on the Fed’s recent announcement.
So yes, refinancing is front of mind for many homeowners. So many, in fact, that refinancing applications have increased by 127% year over year.
But before you rush to refinance, you should consider whether it’s really the deal it purports to be.
“The general rule is to wait until the rate is about 2% lower than your current mortgage interest rate,” says Denise Supplee, a realtor with Long & Foster in Doylestown, PA.
She warns that many people fail to consider the costs associated with refinancing, such as application fees, loan origination, appraisal fees, title insurance, and recording fees.
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Refinancing for a cash infusion
For homeowners who need a quick cash infusion, refinancing can be an attractive option.
“Consumer debt has skyrocketed over the last three to four years due to inflation, and many have turned to credit cards to pay for groceries, gas, and everyday items that are needed to run a household,” says Ron Meyers, president of Ron Buys Florida Houses in Wellington, FL.
Americans currently hold $1.14 trillion in credit card debt, and with interest rates hovering around 25%, refinancing—even if it’s for a slightly higher interest-rate mortgage—seems like a good deal.
“Depending on the rate, if one needs additional funds, looking to do a cash-out refinancing may be a better option than using credit cards or a high-interest personal loan,” says Supplee.
This is probably to No. 1 reason people refinanced this year, as rising property values have made this possible, add Fred Goncher, a mortgage broker with Backyard Mortgage in Garnerville, NY.
In some cases, says Goncher, people are refinancing in order to purchase a second home or investment property. For others, refinancing is being used for “home repairs or renovations that they had otherwise put on hold because of higher interest rates,” Shmuel Shayowitz, president of Approved Funding Corp., of River Edge, NJ.
Replacing an ARM without spending an arm and a leg
“Many buyers that purchased in the past two years at higher rates would have likely used financing programs to make the payments work, whether that was a 2-1 buydown or 7-year adjustable-rate mortgage,” says Sam Fitz-Simon, a realtor with Compass in Danville, CA.
Right now, some homeowners with adjustable-rate mortgages—mortgages where the rate is tied to the market and is adjusted typically once or twice a year—are looking to refinance to a fixed-rate mortgage even if today’s rates are higher than the rate they have now. Why? For these homeowners, having a stable-but-higher rate is better than an unpredictable one.
Ron Meyers, president of Ron Buys Florida Houses in Wellington, FL, says he had an adjustable-rate mortgage client who worried her payments would increase to an unmanageable rate.
“We worked together, and she decided to refinance into a fixed-rate mortgage for payment stability,” he says. “It gave her peace of mind, knowing her payments wouldn’t change.”
What to know before refinancing
Anyone thinking about refinancing—for any reason—should consider that there are a lot of costs associated with it, and you could potentially be paying more interest for your home in the long run.
“Extending the loan term could mean paying more in total interest over time, even with a lower rate,” says Meyers. “So it’s important to weigh the long-term benefits against the immediate costs, and make sure it aligns with your financial goals.”
