H
omeowners who have been struggling with high interest rates over the past couple of years may be in luck as mortgage rates are finally falling. This drop in rates could motivate some owners to take a chance on refinancing their mortgages. According to Freddie Mac's chief economist Sam Khater, this decrease in rates is providing existing homeowners an opportunity to refinance their mortgages. Some homeowners are already taking advantage of this opportunity, as refinancing applications have increased by 58.2% from last year, reaching their highest levels since 2022.
Refinancing can be a good option for homeowners looking to save money on their mortgages. However, before making any decisions, homeowners should consider all factors involved in the refinancing process.
To determine if refinancing is a good idea, homeowners should run the numbers and consider the marginal benefit against the costs. While refinancing does incur closing costs, it can significantly reduce monthly payments and overall interest over time. For example, refinancing from a 7.79% interest rate to 6.49% could lower monthly payments by around $261, saving homeowners roughly $95,600 in interest over 30 years.
However, homeowners should also 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 homeowners plan to stay in their home longer than this break-even period, refinancing likely makes sense.
It's important to note that homeowners will have to go through the closing process again, including paying for an inspector, an appraiser, their lawyer, and title costs. Depending on the terms of their original mortgage, homeowners might be hit with a prepayment penalty, which is typically between 2% to 4% of their original loan amount.
Homeowners should also be aware that when they refinance, their loan will start over again. If they had been paying off their mortgage for two years on a 30-year mortgage, they would be on the hook for another 30 years. However, they can often renegotiate the length of their mortgage.
Homeowners considering refinancing should know that they can refinance as often as they like. Lindsey Harn, a real estate agent, says clients are already coming to her about refinancing. She recently refinanced her own home and recommends homeowners check in with their lender to be kept on their radar when rates hit their target level.
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, which is one of the benefits of being a homeowner.
A mortgage advisor should be able to give guidance as to whether the applicant should wait or lock in immediately. They should also advise about any 'float-down' interest rate options that would be made available during the process if rates dropped before closing.
Homeowners should also keep in mind that the Federal Reserve has said 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, homeowners should 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! 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.
In conclusion, if the refinance helps homeowners save money and the fees are $0 or negative, there is no reason to wait. If rates fall further, homeowners can always back out of the original application and reapply with a different lender or refinance again. This is why it's recommended to refinance and get the lender to pay for the closing costs. If there are no closing costs, there is no recoupment time to make the refinance worthwhile.
