Of course, mortgage rates have dropped considerably. They plummeted from over 7% earlier this year to more sustainable levels after the Federal Reserve clearly signaled a long-awaited rate cut on Wednesday. As a result, a large number of homeowners are beginning to accept that they are unlikely to refinance their mortgages. The need for people to refinance has jumped almost 60% with the recent decrease in interest rates.
Since 2021, over twice as many outstanding mortgages still have rates over 6%. This latest increase has driven countless homeowners out of the market and into unaffordability in terms of monthly payments. The recent cut in rates gives an opening these folks need to reduce their financial burdens. Our example homeowner—someone who took out a 30-year, fixed mortgage of $400,000 at a 7 percent interest rate—makes monthly payments of roughly $2,661. If they refinance to a new 6.25% rate, their monthly payment would reduce to $2,463, a $198 monthly savings. If the rate were to fall to 5.75%, your monthly payment might be another $129 lower. Combined with your upfront payment, this would lower your net payment to $2,334.
In light of these exciting new developments, we turned to a panel of experts to discuss the benefits and considerations of refinancing a mortgage. Stephen Kates, a certified financial planner and financial analyst with Bankrate, attributed major benefits to refinancing. He noted that refinancing is generally only worth it when the new refinance rate is more than one-percentage-point lower than the current interest rate. He encouraged homeowners not to refinance too many times. That doesn’t mean it’s the right solution for them.
“You’re funding your mortgage lender’s kid’s financial education probably more than you’re benefiting yourself,” – Stephen Kates
John Hummel, head of retail home lending at U.S. Bank, recently opened up about the current state of the market. He acknowledged the recent dip in mortgage rates. As a result of this major shift, millions of homeowners who purchased their home in the last three years can consider refinancing.
“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
Even with that hopeful news about mortgage rates coming down, Kates stays wary. She explains that although some consumers would benefit immediately from refinancing, others would not experience much of a difference, if any. He added that for the average consumer, Wednesday’s rate cut will not be a game-changing development.
“This isn’t going to change anybody’s life overnight,” – Stephen Kates
Michele Raneri made a particularly salient point. The consumer finance implications of the Federal Reserve’s recent actions remain to be seen, but these moves should provide relief from some of the financial stressors caused by rising inflation.
As Americans continue to consider their refinancing options, housing experts urge homeowners to weigh their unique financial circumstances. As for whether refinancing is a good idea, Yoon said it really depends on individual personal circumstances. Homeowners need to be doing their homework to closely run the numbers. This will better help them determine whether reducing their monthly payment justifies lengthening their mortgage term.
Kates highlighted that refinancing can effectively reduce mortgage rates from 7% to 6%, making it an attractive option for many. The first thing he illustrated the need for was understanding your overall financial objectives before you take the step to refinance.
“The bigger that spread is, the better it’s going to be,” – Stephen Kates