Now that the Fed has made its first big move in years to lower interest rates, a question has emerged for homeowners who borrowed money for a mortgage recently and are paying a lot in interest: Should I refinance?
Let’s break it down.
How Mortgage Rates Work
Mortgage rates do not move in tandem with the Fed’s actions, but they are influenced by them. They largely track the yield on 10-year Treasury bonds. Those are driven by a variety of factors, including the outlook for inflation, the Fed’s decisions and how investors react.
The average interest rate for 30-year fixed mortgages was 6.09 percent on Thursday, according to Freddie Mac, down from 6.2 percent last week and 7.19 percent a year ago. They had been as high as 7.79 percent 11 months ago.
Rates have been volatile in recent years, and they often shift in anticipation of the Fed’s next move. But they also react to broader economic news.
“Long-term mortgage rates will fall if economic data indicates a weakening economy,” said Melissa Cohn, regional vice president of William Raveis Mortgage, a mortgage lender in Shelton, Conn. “Employment numbers will be key.”
The Fed is probably not done lowering its benchmark rate. Yesterday, it indicated that there may be another half point in cuts coming this year. Its next announcement will come during the first week in November.
It’s also helpful to think about the current levels in context. Sure, they still feel high compared with the sub-3 percent levels from the pandemic years. But they’re still below average when you take a longer view: Rates averaged about 7.8 percent over the past half-century, according to Freddie Mac, which began tracking borrowing costs in 1971. In the early 1980s, rates stretched well into the double digits, exceeding 18 percent in 1981.
Candidates for Refinancing
This is both a math question and a forecasting one.
Refinancing often makes sense only if you expect to remain in the home long enough to recover your closing costs and other fees, which are generally about 2 to 3 percent of the loan amount. (If a lender is offering you a reduced or no-cost refinance, it’s probably getting paid in the form of a higher interest rate.)
A mortgage refinance calculator like the one that Fannie Mae has on its website lets you enter your current payment and a new interest rate for any potential refinanced mortgage. Then, you can examine the potential savings.
As for the forecasting part, Sam Khater, chief economist at Freddie Mac, said the Fed’s recent move was mostly baked into the current rate now, but he expected “rates to fall further, sparking more housing activity.”
Other Reasons to Refinance
With any refinancing, your existing mortgage is paid off and you take out a new one equal to the balance you owe.
Refinancing into another 30-year loan with a lower rate should reduce your monthly payment and provide you with some budget flexibility. But you may pay more interest over time (though making extra payments toward the loan principal can shorten the total term of the loan).
Conversely, a mortgage with a shorter term — say 15 or 20 years — can result in more interest savings.
Tactics for Shopping Around
If you have a fixed-rate mortgage, call your current lender first and ask for a better rate. The company might lower it rather than lose you, though there may be fees involved.
Want to shop around? As ever with personal finance, the more expensive and important something is, the more complicated the marketplace tends to be.
The New York Times has published several guides that might help. A basic one called “How Do I Get a Mortgage?” is a good refresher, an article explaining gimmicks in the home lending marketplace will help you strap on armor and an explainer on loan closing costs will prepare you for that nasty surprise.
Before you begin shopping, check your credit reports at each of the three credit reporting companies to ensure there are no inaccuracies. You can get free copies at the website annualcreditreport.com, which is run by the big three.
Start the shopping spree with your current bank. Walk into the branch of a local bank and see what it can offer. Seek out a credit union, if you’re eligible to join one.
And if you dare, wade into the sea of online comparison shopping sites. There, you may find so-called direct lenders competing for your business — financial companies that have no local offices near you and may only or mostly do mortgage lending.
No matter how you intend to shop, be prepared with pay stubs and tax returns, and lift the freeze on your credit files if you’ve frozen them. Mortgage shopping is a process, and it will probably take tens of hours to complete a refinance.
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