Interest rates for mortgages took a nosedive in the week ending Aug. 8, dropping to their lowest levels since February 2023. This sudden decrease is expected to trigger a surge in refinancing activity among homeowners.
Specifically, the 30-year fixed-rate mortgage saw a significant 31 basis point decrease, averaging 6.29%. This marks the lowest rate recorded since the week ending Feb. 2, 2023.
Notably, the 30-year mortgage has fallen by over a percentage point compared to the period from late August to mid-November last year when it peaked at 7.95% the week before Halloween.
If your current mortgage rate is significantly higher than the current rates, refinancing could lead to a reduction in your monthly payments. The question now is whether it’s advisable to refinance immediately or wait in anticipation of even lower interest rates. Here’s how to approach this decision.
Evaluate the difference between your current rate and potential rate
To begin, assess your loan account to determine your current interest rate and compare it to the current mortgage rates. If you secured a mortgage between late August and November last year, chances are the current rates are approximately one percentage point lower.
Reducing your mortgage rate by a percentage point can result in substantial savings. For instance, with a $300,000 loan at 7.5% interest, the monthly principal and interest amount to $2,098. At a 6.5% rate, the monthly cost decreases to $1,896, saving you around $201 monthly.
The decision to refinance based on a one percentage point difference varies among financial advisors. Some suggest refinancing if you can lower your rate by at least half a percentage point, while others recommend waiting until you can achieve a two percentage point reduction. The optimal approach falls somewhere between these two extremes.
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Consider more than just the interest rate
Securing a lower interest rate is only the initial step in the refinancing process. According to Steven Calio, a certified financial planner at CSG Financial in Dover, Delaware, refinancing a mortgage involves various factors beyond the interest rate.
These factors encompass closing costs, break-even timelines, and the duration you intend to stay in the property.
Understanding closing costs and break-even points
If you recently purchased a home, you likely recall the closing costs – fees for essential services required to finalize the mortgage, such as loan origination and taxes. These costs typically range from 2% to 6% of the loan amount.
To determine the viability of refinancing, you can calculate the break-even period, which indicates how long it will take for the monthly savings to surpass the closing costs. This is achieved by dividing the closing costs by the monthly savings.
For example, if you’re paying $7,000 in closing costs to save $200 monthly, dividing 7,000 by 200 results in 35. This means it will take 35 months for the accumulated monthly savings to equal the closing costs, known as a 35-month break-even period in mortgage terms.
If you anticipate owning the home beyond the break-even period, refinancing is likely to yield long-term savings. BW’s refinance calculator can assist in this process.
Strategies to reduce out-of-pocket expenses
If you have ample equity, your lender might permit you to roll some or all of your closing costs into the loan amount. While this lessens the upfront payment at closing, it increases the loan size and subsequently the monthly installments.
Alternatively, the lender could cover most of the refinancing closing costs in exchange for a slightly higher interest rate – lower than your current mortgage rate but higher than the lowest possible rate achievable by paying the closing costs upfront.
This approach makes future refinancing less burdensome if rates drop further, as explained by Noah Damsky, a chartered financial analyst at Marina Wealth Advisors in Los Angeles. “Paying $10,000 in upfront costs each time could make refinancing a one-time event,” he noted.
Should you wait for rates to decrease further?
Economic forecasters from Fannie Mae, Mortgage Bankers Association, and National Association of Realtors previously projected a gradual decline in the 30-year mortgage rate, dipping below 6.5% by mid-2025.
The recent rapid rate drop raises questions about potential rebounds and further declines. The uncertainty prompts the ultimate question: Is it wise to forego the current refinancing opportunity and wait for even lower rates?
Noah Damsky emphasized the upfront cost of refinancing as a major obstacle to decision-making. He cautioned against refinancing now only for rates to plummet by another 1% later in the year, necessitating a subsequent refinancing with additional closing costs.
Gene Thompson, a certified financial planner at Iconoclastic Capital in Rochester, New York, advised homeowners to base their decisions on current expenses and potential savings from refinancing, without fixating on uncertain future possibilities.
Remember, the decision to refinance is personal and should be based on your individual financial circumstances. It’s crucial to weigh the costs and benefits carefully before making a final choice.
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