Mortgage rates have dropped to their lowest level in nearly a year, sparking a wave of refinancing among homeowners. While some have already taken advantage of the current rates, others are holding out hope for even lower rates in the future.
In the week ending Sept. 11, the average rate on a 30-year fixed-rate mortgage fell by 16 basis points to 6.46%, marking the lowest average rate since mid-October 2024, according to data provided by Zillow to BW.
More people are opting for refinancing
Recent data from the Mortgage Bankers Association indicates that nearly half of mortgage applications last week were for refinances, showing a modest increase from the previous week and a 34% jump from the same period last year.
August saw a surge in refinancing activity, even when rates were higher than they are now, as borrowers responded swiftly to rate improvements. Mike Vough, head of corporate strategy at Optimal Blue, noted that it was the strongest month for rate-and-term refinances this year.
In a rate-and-term refinance, the old mortgage is replaced with a lower-rate mortgage of the same amount, with the goal of reducing monthly payments.
Assistant Vice President of Mortgage Originations at Affinity Federal Credit Union, Carolyn Morganbesser, advises caution when considering refinancing, emphasizing the importance of evaluating the break-even period.
The decision to refinance hinges on the break-even period.
A shorter break-even period is more favorable
When refinancing, there are various closing costs to consider, which typically amount to thousands of dollars. The break-even period signifies the duration required for the monthly savings to surpass the closing costs.
The break-even period is calculated by dividing the costs by the monthly savings. For instance, if $5,000 in fees result in $100 monthly savings on the mortgage, the break-even period would be 50 months.
Waiting over four years to break even may not be ideal, unless it’s your long-term residence. Morganbesser suggests being cautious with break-even periods exceeding two years, recommending a wait-and-see approach for potentially lower rates.
Navigating an uncertain economy
Despite the recent rate drops, the economic outlook remains ambiguous, contributing to a murky forecast.
Weak job creation has been a driving factor behind the declining mortgage rates in recent weeks, with rising unemployment rates and downward revisions in job growth numbers. Anticipating a rate cut by the Federal Reserve, investors have reacted by pushing mortgage rates lower.
However, the persistent presence of inflation poses a challenge. With the core consumer price index surpassing the Fed’s target, a rate cut might address unemployment but not inflation, potentially leading to higher mortgage rates.