On Wednesday, the Federal Reserve finally announced the long-anticipated short-term rate cut. This announcement sent homeowners and financial advisers scrambling to figure out who could benefit most from refinancing their mortgages. Even as inflation remains well above the Fed’s target, mortgage rates have fallen to 6%—a far cry from their January highs of 7.1%. This dramatic decline provides some hope to millions of borrowers.
As of September 2023, the share of outstanding mortgages with rates exceeding 6% has more than tripled. Combined with the recent decline in mortgage rates, this increase has spurred a nearly 60% jump in refinancing demand. Homeowners are ready to make the most of these ideal circumstances! As a result, for the first time many homeowners are wondering if they should hit the gas and seize the moment.
The implications of refinancing are significant. Let’s say a typical homeowner has a $400,000 fixed-rate mortgage over 30 years. At a 7% interest rate, their mortgage payment would be roughly $2,661 per month. With a refinance down to 6.25%, their monthly payment would be reduced by $198 to $2,463. In fact if interest rates go down to 5.75%, you’ll pay over $129 less on your home. This would increase your total payment to $2,334.
Experts say that refinancing is most effective when the current interest rate is 1 percentage point higher than the new market refinancing rate. This difference can add up to thousands of dollars in savings. Stephen Kates, a certified financial planner and Bankrate analyst, emphasized the importance of recent mortgage rate decreases in creating new opportunities for existing homeowners. He says it will require several rate cuts before borrowing costs are likely to drop much.
“The bigger that spread is, the better it’s going to be,” – Stephen Kates
John Hummel, head of retail home lending at U.S. Bank, shared his observations regarding the recent trends in mortgage rates.
“We have already experienced lower mortgage rates the last two weeks, giving many homeowners who purchased a home in the past three years, the opportunity to refinance,” – John Hummel
For most consumers, though, the question of whether to refinance comes down to personal finances. Joseph Yoon, a consumer insights analyst at Edmunds, added that borrowers with fixed-rate private student loans or federal loans would stand to benefit from refinancing if interest rates continue to fall. He underscored that it’s crucial for borrowers to weigh other key factors before deciding. There are substantial negative consequences to refinancing federal student loans. Borrowers may lose access to key consumer protections such as deferments, forbearances, income-driven repayment plans and loan forgiveness programs.
Additionally, Kates advised against frequent refinancing. He noted that the approach of refinancing every time interest rates fall by 0.25 percentage points would be both impractical and counterproductive.
“You’re funding your mortgage lender’s kid’s financial education probably more than you’re benefiting yourself,” – Stephen Kates
Now experts are scrambling to assess what those impacts might be. They’re pleased that these lower rates will help reduce inflationary pressures, and it will take time to see how this benefits consumers’ financial health and wellbeing.
“While the broader impact of a rate reduction on consumers’ financial health remains to be fully seen, it could offer some relief from the persistent budgetary pressures driven by inflation,” – Michele Raneri
Kates noted that for many consumers, this rate cut may not lead to immediate changes in their financial circumstances.
“This isn’t going to change anybody’s life overnight,” – Stephen Kates
Now that the new rate cut has come into effect, it’s time for homeowners to research all of their opportunities. It’s important for them to evaluate their unique financial circumstances. Regardless, experts insist that refinancing may or may not be a smart move for an individual’s specific situation.
“Whether or not it’s a good idea to consider a refinance really depends on your financial situation,” – Joseph Yoon