It’s unclear when the Federal Reserve could begin cutting interest rates, but many homeowners who took out a mortgage in recent years — as rates hovered between 6% and 7%, and even touched 8% — are paying attention for opportunities to refinance.
Thanks to those high mortgage interest rates, refinance activity in 2023 was at the lowest level in 30 years.
In the first and second quarters of 2023 there was only $75 billion and $80 billion, respectively, in mortgage refinance originations nationally, according to Freddie Mac, a government-sponsored entity that buys mortgages from banks.
“Because rates shot up so much over the past few years, refinancing activity has mostly disappeared,” said Jeff Ostrowski, a housing analyst at Bankrate.
Refinancing activity rose 2.9% in February compared with last year, Freddie Mac found. However, fewer owners might refinance their loans as they might still be locked in on historically low rates or may see little incentive to do so, the mortgage buyer forecasts.
As homeowners wait to see when Fed rate cuts might materialize, and to what extent, here are three signs it may be smart to refinance:
1. You can cut your rate by 50 basis points or more
The right time to refinance your loan depends on when you bought your house, said Chen Zhao, a senior economist at Redfin, a real estate brokerage site.
It’s typically smart to wait for rates to go down by a full percentage point because it makes a significant difference in your mortgage, experts say.
Yet, once you start seeing rates decline by at least 50 basis points from your current rate, contact your lenders or loan officers and see if it makes sense to refinance, depending on factors including the costs, monthly savings and how long you plan to be in the home, Zhao said.
“There are costs associated with it, but the costs are low in comparison to the savings over the long term,” said Zhao.
While the outlook on Fed rate cuts continues to change, rates are unlikely to go much below 6% in the near term, Zhao said.
“We’re just in a much higher interest rate situation with the economy,” she said.
Don’t hold out for a super low rate like the ones consumers saw in the early stages of the Covid-19 pandemic.
“We’ve been so accustomed to mortgage rates as a baseline being at 2% or 3%,” said Veronica Fuentes, a certified financial planner at Northwestern Mutual. “That’s what we expect the norm to be, but that’s actually not the case.”
2. You can pay cash for closing costs
When you refinance, “it’s like doing a brand new loan all over again,” Ostrowski said.
That means you’ll incur closing costs, typically including an appraisal and title insurance.
The total cost will depend on your area or state.
The average closing cost for a refinanced single-family mortgage was $2,375 in 2021, up 3.8%, or $88, from $2,287 a year prior, according to CoreLogic’s ClosingCorp, a provider of residential real estate closing cost data.
Refinancing can make more financial sense if you are able to pay those upfront instead of rolling the expense into your new loan. Some lenders may require a higher interest rate if you finance closing costs, plus you’ll be paying interest on those expenses for the life of the mortgage.
“You have to be pretty mindful and have a good strategy for how much money you’re going to save and whether it makes sense,” Ostrowski said.
3. You bought your home with an FHA loan
If you bought your home with an FHA loan, you might have a reason to refinance. While such loans are a “great tool” for securing a home as a first-time buyer, there’s a required mortgage insurance premium, or MIP, that can be costly, said Ostrowski. Most new borrowers pay an annual MIP that is equivalent to 0.55% of their loan, according to government figures.
“If you got an FHA loan, it could make sense to refi for a rate that is only a little bit lower if you’re going to be able to knock out that mortgage insurance premium,” he said.
For example, on a $328,100 FHA mortgage, the owner would pay annual premiums at 0.55% rate for the life of the loan, equal to $150 monthly payments, according to calculations from Bankrate.