Mortgage rates are falling (slightly): what to consider when refinancing

Earlier this week, the Free Market Committee (FOMC) of the US Federal Reserve agreed to maintain federal funds in their current position. Although the Bureau of Labor Statistics (BLS) reported no increase in the Consumer Price Index for May, previous reports from the agency had shown that certain sectorsincluding housing, continued to push up average prices.

This highly anticipated announcement comes as mortgage rates (30-year fixed rate) have continued to fall from their peak of 7.79 percent in October last year. Although rates are trending downward, they have moved in both directions over the past nine months, and the announcement that interest rates will not fall in June could cause them to start rising again in the weeks to come.

This comes as those who recently purchased a new home with a high interest rate may be eager to refinance it. Let’s see what the experts say about this and which cases should consider refinancing more than others.. Apart a few who purchased their home in this high rate environment, there are not many homeowner profiles for whom refinancing would be a good option. Homeowners who purchased their property before the Fed started raising rates likely already have a lower interest rate added to their mortgage, and those considering it might be better off waiting for rates to fall as they remain high relative to their average position over the past two decades.. Obviously, their current level is a response to the economic conditions caused by the COVID-19 pandemic and international conflicts.

However, there are early signs of improvement and, over the coming year, the Fed could start cutting rates. Speaking to a financial expert who has a fiduciary duty to you, meaning they must consider your economic interests rather than those of their employer, is one way to get expert advice for your particular situation when considering refinancing .

What if… you just bought your house

Let’s look at our initial case of someone who purchased a home in the last two years as interest rates began to rise. Most financial experts follow a simple rule, especially when rates are high: If refinancing means adjusting to a rate less than one percent lower than your current rate, pass it up.

Although you might consider refinancing twice, Your loan negotiation fees add up and could end up costing you if you pay more than you save each month before refinancing again. Additionally, for buyers who purchased their home before the Federal Reserve began its series of rate hikes, interest rates are likely lower than their current levels.

When could this be a good idea…

Think of your mortgage for a moment as two things: the principal (what you owe) and the interest rate (the rate that will be applied to the principal each month to be paid as a fee to the person servicing the loan). Let’s say you get an interest rate reduction of more than 1 percent. In this case, you’re more likely to see a significant reduction in the portion of your payment going toward interest compared to your principal balance.. In short, by lowering the interest rate, more is spent to reduce the principle, whereas previously it was a question of reducing the interest added to the balance.