For the average homeowner, mortgage rates have more than doubled since 2021 when the average 30-year fixed mortgage rate was well below 3.00%. In August 2024, the same mortgage rate had climbed to 6.46% but remained lower than the recorded high of 7.79% in October 2023.
Persistently high inflation during the last couple of years has meant that the Federal Reserve had to increase interest rates to help stabilize the economy and prevent a possible hard landing. However, things might change soon, as incoming economic data are starting to paint a more positive picture for the Federal Reserve.
For starters, inflation has continued to decline over the past few months, hitting its lowest level since March 2021. Mortgage rates have also started falling, something many homeowners and would-be buyers have been holding out for.
Considering the improving conditions, many expect that the Federal Reserve will begin cutting interest rates by September. Though the outlook seems promising, it’s worth mentioning that many don’t expect the central bank to cut interest rates by more than 0.5%.
Nonetheless, even the smallest decline can make a big difference for homeowners and would-be home buyers. Fortunately, those sitting with mortgages don’t have to wait until later in the year when rates are lower. Multiple signs could prove it worthwhile to apply to refinance your mortgage, and below we’ll discuss five that you should consider.
You can obtain a slightly lower rate than you currently have
Though mortgage rates are by no measure what they were just three years ago, there have been some improvements since, and lower mortgage rates have started showing face on the market.
In recent months, mortgage rates have gradually declined, leaving more room for homeowners and buyers to consider refinancing. While rates remain high, in reality, they are well below the standard rates of the 1980s, 1990s and early 2000s.
For instance, in 1981, interest rates peaked at 19.04%, and pushed mortgage rates to an all-time high of 18.53%, while historical CD rates continued to climb. Even more, current mortgage rates are still lower compared to the 8.64% of May 2000 at the height of the dot-com market crash.
With property experts and economists beginning to factor in the possibility of near-term interest rate cuts, now might be a good time to review whether you can obtain a lower mortgage rate.
The current 30-year fixed mortgage rate is 6.46%, having come down from 6.49% a week before. This would mean that if you are sitting with a mortgage rate of 7.50% with a similar loan length, then now might be a good time to start thinking of refinancing your mortgage.
Similarly, a 15-year fixed mortgage is now lower compared to a few months ago. By August, 15-year rates were sitting at 5.62%, significantly lower compared to 6.07% a month earlier. For some homeowners, the shorter repayment period may be a bit of a challenge, but even still, having a mortgage that’s a full percentage point lower can be worth exploring.
You can benefit financially
By refinancing your mortgage, you could potentially be benefiting from lower payments, which in the near term can be a financial benefit to you and your household.
While circumstances may vary, and depending on your mortgage lender, you will need to take into consideration that additional costs may affect whether you are saving on your monthly payment or not.
Seeing as you will be refinancing an existing mortgage, you will mostly be expected to undergo the entire mortgage application process again. This would include having to pay for an appraisal, application fees, an attorney, and any additional title and insurance fees.
Typically, mortgage lenders will expect you to pay between 3% and 6% of the loan’s original total value as closing costs. This would mean that on a $150,000 loan with a 3% closing cost, you will be expected to pay an additional $4,500 upfront.
In most circumstances, mortgage lenders will provide you with the most beneficial option, but you will need to punch the numbers to ensure that you are financially benefiting from refinancing your mortgage.
While you might be required to pay for the closing costs you could always roll this over into your loan. Still, you will need to calculate whether this will be a cheaper option compared to your current mortgage.
Should you have a rental property or looking to purchase a rental property, make sure that you consult with a property management company beforehand. They will provide you with the necessary guidance, and ensure that you can obtain the most financially beneficial option for your needs.
Your mortgage lender covers closing costs
Again, it’s important to remember that circumstances may vary, but there may be instances where a mortgage lender will cover the closing costs for you, but this could mean a slightly high interest rate.
Should you find that your mortgage lender can cover the closing costs on your behalf, while offering you a lower interest rate than what you currently have, then this might be a great opportunity to consider.
As a first-time buyer or homeowner, it’s advised to consult with a mortgage broker or advisor beforehand. There are plenty of pitfalls that you may stumble across, which in the long run could increase the amount of interest you pay.
Take for example you are interested in refinancing a $285,000 loan with a 30-year fixed mortgage rate of 6.46%. You are required to pay the closing costs upfront, which amounts to $8,550 at 3% of the original loan amount value. Once the loan matures, or have reached the end of the loan payment period, you would’ve paid $219,314 in interest, should you be required to pay the closing costs upfront.
Now, in another scenario, your mortgage lender might cover the closing costs on your behalf, however, they raise your annual percentage rate (APR) to 6.9%. This slight increase in your mortgage rate would then increase your total interest paid to $258,427 by the time the loan matures. An increase of 0.44% would mean that you will pay $39,113 more for your loan than you would have if you paid the closing costs.
Calculating how much more you will be paying for the same loan amount will help put things into perspective. Should your mortgage lender cover the closing costs, without having to raise your interest rate or add additional fees to your mortgage you can consider the possibility of refinancing your mortgage.
You can take advantage of float-down interest rates
Float-down interest rates give you the ability to take better advantage of lower interest rates after you have locked in your mortgage. This can be beneficial to homeowners who want to benefit from lower interest rates in the near future.
Should you want to take advantage of float-down interest rates, you should consider consulting with a mortgage advisor beforehand. Although float-down options may help to lower your repayments, you might find that there are additional fees and penalties that you might need to cover.
For starters, it’s important to consider that not all lock-in mortgage rates have a float-down option. On top of this, you may be subject to fees, should you decide to include a float-down option in your agreement with your mortgage lender.
Additionally, should you be buying a home for a shorter period, then a float-down interest rate won’t make much sense. Taking advantage of float-down options is more sensible for those individuals who want to lower their premiums over a longer time horizon.
While a float-down rate may protect you against higher interest rates, you may find that these options are more expensive, and seeing as your mortgage lender can’t predict the direction mortgage rates will move, you will need to constantly monitor rates until they have fallen to your desired level.
The best way to take advantage of float-down interest rates is to consider all the pros and cons. More than this, should you already have this option included in your locked-in mortgage agreement, then you can decide whether you want to exercise this opportunity.
Your lender offers a substantially lower rate
There may be instances where a mortgage lender could provide you with a substantially lower interest rate compared to what you currently have. This might include the option to find rates that are half a point or even a full one point lower than what you may be sitting with at the moment.
While these instances may be rare, there are some ways that you can achieve locking at a lower rate. For example, you might need to purchase a mortgage from your mortgage lender, this might require you to take on additional fees but could result in lower interest rates.
This strategy could make refinancing your mortgage worthwhile, however, it’s important to consider that this option is not always available to everyone. On top of this, although you might end up with a lower interest rate, taking on additional fees could mean that you either break even with your original mortgage amount or fall slightly below it.
Then don’t forget that when refinancing your mortgage, you will be required to pay closing costs and pay for the points. These initial upfront costs can be a heavy financial burden, but should you find that your mortgage can come down by a full percentage or more, then you should consider exploring this option.
Frequently Asked Questions
When is the best time to refinance your home?
This largely depends on your financial situation. Many mortgage lenders will require you to pay the closing costs, which range from 3% to 6% of your initial loan amount. This might increase the upfront financial burden for homeowners but could result in a potentially lower mortgage rate.
How often can you refinance your mortgage?
There is currently no limitation to the amount of times a person can refinance their mortgage. This allows homeowners more leverage to negotiate a better rate with their mortgage lender. Should rates come down, you can decide on whether you want to refinance, similar to if rates move in the opposite direction.
Should I refinance my mortgage if interest rates come down?
While the Federal Reserve does not dictate how much a person will pay on their mortgage, their control over interest rates can influence the level to which mortgage lenders may set their rates. Should interest rates come down in the future, you may likely see a decline in mortgage rates, however, mortgage rates are set by the lenders and can vary.
Does changing mortgage lenders impact my credit score?
Transferring an existing mortgage from one lender to another may not directly impact your credit score, however, a credit bureau may conduct a credit check while you are shopping around for a new mortgage lender. Should you have multiple queries within a 14 - 45 day period credit bureaus may view these as a single query. Having multiple hard queries on your name within a shorter period could impact your credit score.
What are alternatives to refinancing your mortgage?
Using alternatives to refinancing your home may depend on your financial situation and mortgage lender. Some alternatives include a home equity line of credit (HELOC), a cash-out refinance, selling your property, or using it as an investment property. Each alternative can come with different pros and cons and it’s important to consider which is most suitable for your financial position.
How long will it take to refinance your mortgage?
Depending on your mortgage lender, the process is relatively quick and can be completed within 30 to 45 days. It’s important to remember that some factors may influence the process, such as the completion of inspections and appraisals. Other things that may delay the process are property size, financial well-being, and completion of personal information.
The Bottom Line
Knowing when the right time will be to refinance your mortgage will depend on each person’s financial circumstances. On top of this, mortgage lender requirements will vary, and there are other financial implications that you will need to think about.
While mortgage rates have declined in the last couple of weeks, and with the expectation of interest rates coming down in the weeks and months to come, this does not necessarily solidify the need to refinance your mortgage.
Various factors can influence a person’s ability to refinance their house, and it’s advised to consult with your mortgage provider or a mortgage advisor beforehand. Next, it’s important to consider the various financial implications that come with refinancing your mortgage.
Should you feel that there are enough positives that point towards the possibility of lowering your mortgage rate, then it’s worth considering the option. However, if you notice that you will not be better off financially in the near term, then it’s best to keep your mortgage rate where it is and decide at a later time when interest rates have significantly come down.