Considering Refinancing Your Mortgage? Lower Rates Are Just One Factor to Consider

Mortgage rates haven’t been this attractive in over a year, good news for homeowners looking to refinance.

Many homeowners have already taken the opportunity to reduce their monthly payment, causing a surge in mortgage refinancing requests.

And that was before the average rate on a 30-year mortgage fell this week to 6.2%, according to mortgage buyer Freddie Mac. Last May, the rate averaged 7.22%. It is now at a 19-month low.

The rush to refinance makes sense, because even a small drop in mortgage rates can translate into significant savings in the long run. For a home priced at the median U.S. price of $422,600, a buyer who puts down 20% at this week’s average mortgage rate would save $360 per month compared to what it would have cost to buy the same home in October, when the average rate hit a 23-year high of 7.79%.

But there are more things to consider than just the mortgage rate. Refinancing can cost thousands of dollars, and not all of the costs can always be rolled into the new loan.

It can take months or even years to break even on a refinance, depending on the difference between your current rate and your new rate, so refinancing may not be a good idea if you plan to sell the home before that happens.

Here are some key factors to consider when determining if now is the right time to refinance your home loan:

Are rates attractive enough to make refinancing worthwhile?

Although mortgage rates have fallen, the average rate on a 30-year home loan is still more than double what it was just three years ago.

According to Realtor.com, about 86% of all outstanding mortgages have an interest rate below 6%, and more than three-quarters have a rate of 5% or less. If your mortgage rate is in this range, you should make sure you can refinance to a rate significantly lower than what you currently have.

A rule of thumb to consider is whether you can cut your rate by half to three-quarters of a percentage point, said Greg McBride, chief financial analyst at Bankrate.

“That’s when it’s time to start thinking about it,” he said.

For example, someone with a 30-year mortgage at 7.5% or 8% should expect rates in the low 6% range.

Homeowners with an adjustable-rate mortgage, or ARM, that is set to adjust to a higher rate may also want to consider refinancing while rates are falling.

How long will it take you to break even on refinancing costs?

The balance period when refinancing your mortgage will be shorter the greater your savings. For example, if you refinance your loan from 8% to 6%, the balance period will be much shorter than if you refinance from 6.75% to 6.25%.

So it’s important to consider how long you plan to live in the home, to ensure you’ll cover the cost of refinancing.

Consider overall and upfront costs

Fees and commissions can put refinancers who focus solely on potential savings at a disadvantage. And just because you can typically roll over many or most of the costs into a new loan doesn’t mean that loan is free.

If you roll the costs over to your new loan, you either take on a larger balance or pay a slightly higher rate to offset those costs.

There may also be fees you’ll have to pay at closing, including appraisal fees, title insurance, survey fees, or local taxes beyond the lender’s control.

Should we wait for rates to fall further?

Mortgage rates are influenced by several factors, including how the bond market reacts to the Federal Reserve’s interest rate decisions. That can change the trajectory of the 10-year Treasury yield, which lenders use as a guide to price home loans.

The yield, which hit 4.7% in late April, has since fallen sharply in anticipation of a Fed rate cut. It was at 3.66% in morning bond trading on Friday. Yields fall as bond prices rise.

Signs of slowing inflation and a weakening labor market have raised hopes that the Fed will cut its benchmark interest rate for the first time in four years when policymakers meet next week.

If bond yields continue to fall in anticipation of a Fed rate cut more than once this fall, that could lead to further declines in mortgage rates, even though many economists expect the average rate on a 30-year mortgage to remain above 6% this year.

It could be argued that the bond market’s expectations of a Fed change of course toward easing interest rates have already been priced in, which could mean that mortgage rates won’t fall much more than they already have in the coming months.

If you’re on the fence about refinancing now or waiting for lower rates, it’s a good idea to at least prepare yourself and talk to your lender or shop around so you can act quickly when you’re able to get a good rate.

“We’ll probably see mortgage rates go down, but they can move suddenly and it’s worth jumping on when the opportunity presents itself,” McBride said.

— Alex Veiga, Associated Press