Homeowners who bought their homes in the past year may find themselves in a quandary when it comes to deciding the best time to refinance. The fear of missing out on the historically low rates of 2020 and 2021 can be paralyzing, especially when faced with the possibility of even lower rates in the near future.
This past week served as a stark reminder of how quickly mortgage interest rates can fluctuate. The 30-year fixed-rate mortgage rate shot up by 21 basis points to an average of 6.4%. Compared to the rate of 5.89% just a few weeks prior, the increase is significant. It’s important for homeowners to consider their break-even point when contemplating a refinance. By calculating how long it would take to recoup the costs of refinancing, homeowners can make a more informed decision.
For example, let’s say a homeowner took out a $300,000 30-year conventional mortgage in early October 2023 at a rate of 7.5%. Refinancing to the average rate of 6.12% on Oct. 3, 2024, could result in monthly savings of nearly $300 and total savings of $80,155 over the life of the loan. With closing costs of $6,500, the break-even point would be around 22 months.
Small changes in interest rates can have a big impact on the refinance market. A mere 25 basis point drop in rates led to an additional 1.3 million households benefiting from refinancing. Conversely, a 0.5-percentage point increase in rates could result in over $6 billion in lost potential savings over five years.
If you’re considering refinancing, it’s essential to prepare by getting your finances in order. Check your credit report for any errors, pay down debts to improve your debt-to-income ratio, and avoid making large purchases on credit. Additionally, review your closing contract to see if there’s a prepayment penalty that could affect your decision.
Ultimately, the decision to refinance should be based on your individual financial situation and goals. By carefully considering the costs and benefits, homeowners can make an informed choice that aligns with their homeownership objectives.