Mortgage rates have fallen very quickly from that high point of over 7% in January. This step follows the Federal Reserve’s long-anticipated decision to cut rates for the first time in a decade on Wednesday. This change has opened the door to enormous conversations between homeowners and industry professionals about how advantageous it can be to refinance your old mortgage. Perhaps most dramatically, a huge jump in demand for refinancing has taken hold, with requests soaring close to 60% as interest rates get cut in half.
Since 2021, homeowners—especially people of color—have experienced a tremendous change in the housing landscape. The share of all outstanding mortgages with rates north of 6% has more than quadrupled. The fiscal reality for homeowners is that interest rates remain at historic lows. Consequently, refinance demand is increasing. John Hummel, head of retail home lending at U.S. Bank, highlighted this trend, stating, “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.”
As you navigate these choices in your own life, balance the mortgage rate you might lose with the rate you’ll pay on a new loan. For example, if someone has an existing mortgage at 7% and they refinance down to 6%, that’s a meaningful amount of money saved. For the average homeowner with a $400,000 fixed mortgage at 7%, that would mean a payment of around $2,661 a month. If they refinance to a new rate of 6.25%, their monthly payment would drop to $2,463.36. This simple change might save them $198 a month. You can save even more money! With interest rates at 5.75%, your monthly payment would be reduced to $2,334, an additional savings of $129.
Experts typically advise refinancing when you have a minimum of a 1 percentage point difference between your current interest rate and the new refinance rate. This strategy is the best fiscal strategy as well. Stephen Kates, a licensed financial planner and financial analyst at Bankrate, cautioned homeowners to make wise decisions. “The bigger that spread is, the better it’s going to be,” he stated. He cautioned against frequent refinancing, noting that “you’re funding your mortgage lender’s kid’s financial education probably more than you’re benefiting yourself.”
Although many homeowners stand to gain from lower rates, Kates stressed that refinancing needs to be based on personal financial circumstances. “Whether or not it’s a good idea to consider a refinance really depends on your financial situation,” Kates noted. He noted that for others, Wednesday’s rate cut won’t make much difference to their bottom line. “This isn’t going to change anybody’s life overnight,” he stated.
If interest rates continue to decline, borrowers with private student loans – and even federal loans – can take advantage of the opportunity to refinance. They could discover cheaper products offered to them outside of mortgages. As Michele Raneri pointed out, these changes have a much larger impact on consumers’ financial health. “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,” she remarked.
Especially after the recent surprise rate cut, our readers who are homeowners are more actively thinking about refinancing. They need to do some serious math before committing to the idea. Sure, the prospect of saving hundreds of dollars a month can be appealing, but it’s important to weigh your personal situation. Fiscal hawks are right that we can find places to save in the current environment. That said, it’s important for homeowners to avoid pitfalls reopening the refinancing process and for them to understand their own unique financial circumstances.