For homeowners gouged by high interest rates over the past couple of years, there’s good news: Interest rates are near the lowest they’ve been in more than a year.
This drop in rates might have some owners wondering if they should take a chance on refinancing.
“The decline in mortgage rates does increase prospective homebuyers’ purchasing power and should begin to pique their interest in making a move,” said Sam Khater, Freddie Mac chief economist in a statement. “Additionally, this drop in rates is already providing some existing homeowners the opportunity to refinance.”
Some homeowners are apparently already rolling the refi dice in the hopes of saving big bucks.
Refinance applications are up 58.2% from a year ago—their highest levels since 2022—according to the Mortgage Banker’s Association.
So, should you jump on the refinance bandwagon? Here’s what you need to know before calling your mortgage broker.
Adding up the refinancing equation
If you had told a buyer with a 3.15% interest rate in 2021 that 6.49%—the interest rate as of Aug. 15—was considered low, they’d probably think you sounded ridiculous. But times have changed.
In reality, 6.47% is low compared with standard rates in the 1980s and ‘90s. In October 1981, for example, interest rates peaked at 18.63%. In fact, the high interest rates we’ve seen in the past year aren’t even as high as they were at the beginning of the millennium—in May 2000, the rate climbed to 8.64%.
Rates hit a 23-year high of 7.79% for a 30-year fixed loan last October.
Crunching the refi numbers
“Homeowners should be sure to run the numbers and consider the marginal benefit against the costs, as refinancing does incur closing costs,” says Realtor.com® economist Hannah Jones. “Depending on the expected savings from refinancing at today’s rate, it may make sense to do now, or it may be more beneficial to hold off a bit longer until rates ease further.”
Let’s take a look at what a potential refinance now could look like.
Refinancing from, say, a 7.79% interest rate to 6.49% could significantly reduce your monthly payments and overall interest. For example, on a $300,000 loan, this rate reduction could lower your monthly payment by around $261, saving you roughly $95,600 in interest over 30 years.
However, consider the closing costs, typically 2% to 5% of the loan amount, and the time it will take to break even on these costs (about 31 months for $8,000 in costs). If you plan to stay in the home longer than this break-even period, refinancing likely makes sense.
How costs can add up
Keep in mind, though, that you’ll have to go through the whole closing rigamarole again—including paying for an inspector, an appraiser, your lawyer, and title costs. And depending on the terms of your original mortgage, you might be hit with a prepayment penalty, which is typically between 2% to 4% of your original loan amount.
So again, it depends on whether your mortgage company will cover these costs—and under what terms they’re willing to do so. In some cases, your mortgage company will take care of those closing costs, but it usually means a higher interest rate on the back end.
“If you can refinance your mortgage to a lower rate and receive a lender credit to cover the closing costs, then there is no reason not to,” says Joseph Flannery, director of mortgages at Loan Desk in San Mateo, CA.
Note that when you refinance, your loan will also start over again. So, if you had a 30-year mortgage but had been paying it off for two years, you’d be on the hook for another 30 years—though you can often renegotiate the length of your mortgage.
You can refinance as often as you like
Lindsey Harn, a real estate agent with Christie’s International Real Estate, says clients are already coming to her about refinancing. In fact, she just refinanced her own home.
If you’re eyeing a refinance, Harn recommends that you check in with your lender.
“Ask the loan officer to keep you on their radar when rates hit your target level, so they can quickly lock you in,” she says.
Homeowners who are considering refinancing should know that doing so now will not prevent them from doing so again later.
“There is no limitation to the number of times you can refinance,” says Flannery. “That is one of the benefits of being a homeowner; it’s a one-way negotiation. If rates fall, you can refinance. If rates stay the same or go higher, the lender is stuck with the loan.”
The advantage of float-down interest rates
No matter what, homeowners “should seek counsel with a trustworthy and professional mortgage advisor who can assist with the particulars or their situation,” says Shmuel Shayowitz, president of Approved Funding, a mortgage company based in River Edge, NJ.
A mortgage advisor “should be able to give some guidance as to whether the applicant should wait or lock in immediately,” says Shayowitz. “They should also be able to advise about any ‘float-down’ interest rate options that would be made available during the process if rates dropped before closing.”
A float-down interest rate allows you to take advantage of lower interest rates for a certain period of time after your mortgage is locked in.
The mortgage rate outlook
Homeowners should also keep in mind that the Federal Reserve has said that they’re planning on adjusting rates as soon as September, though don’t expect to see huge shifts early on. Analysts say they don’t expect the Fed to cut its benchmark rate more than 0.5 percentage points initially.
No matter where rates fall, Flannery recommends that you always do due diligence when looking for the best lender to refinance.
“People wrongly assume that the lender they make their payments to will offer them a better deal on refinancing—big misconception!” he says. “The best thing you can do is shop around for your refinance because the rates may vary by around .5%, and the fees may vary by around $10,000.”
Bottom line: “If the refinance helps you save money and the fees are $0 or negative, then there is no reason to wait,” says Flannery. “If rates fall further, you can always back out of the original application and reapply with a different lender or refinance again. This is why I recommend refinancing and getting the lender to pay for the closing costs. If there are no closing costs, there is no recoupment time to make the refinance worthwhile.”
