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It’s unclear when the Federal Reserve might start cutting rates, but many homeowners who took out mortgages in recent years — as interest rates hovered between 6% and 7% and even touched 8% — are paying attention to opportunities for refinancing.
Thanks to these high mortgage rates, refinancing activity in 2023 was at a 30-year low.
In the first and second quarters of 2023 there were only $75 billion and $80 billion, respectively, in mortgage refinance entries nationwide; according to Freddie Mac, a government entity that buys mortgages from banks.
“Because interest rates have risen so much in recent years, refinancing activity has mostly disappeared,” said Jeff Ostrowski, housing analyst at Bankrate.
Refinancing activity rose 2.9% in February compared to last year, Freddie Mac were found. However, fewer homeowners may refinance their loans as they may still be locked into historically low interest rates or may see little incentive to do so, the mortgage buyer predicts.
As homeowners wait to see when the Fed’s rate cuts might materialize and to what extent, here are three signs it might be smart to refinance:
1. You can lower the interest rate by 50 basis points or more
The right time to refinance your loan depends on when you bought your home, said Chen Zhao, senior economist at Redfin, a real estate brokerage website.
It’s usually smart to wait for rates to drop by a full percentage point because it makes a big difference to your mortgage, experts say.
However, once you start seeing rates drop by at least 50 basis points from your current rate, check with your lenders or loan officers and see if refinancing makes sense, depending on factors like cost, monthly savings, and length of time you intend to home, said Zhao.
“There are costs associated with this, but the costs are low compared to the savings in the long run,” Zhao said.
While the outlook for Fed rate cuts continues to change, rates are unlikely to go much below 6 percent in the near term, Zhao said.
“We’re just in a much higher interest rate situation with the economy,” he said.
Don’t expect an extremely low rate like what consumers saw in the early stages of the Covid-19 pandemic.
“We’re so used to mortgage rates basically being at 2% or 3%,” said Veronica Fuentes, a certified financial advisor at Northwestern Mutual. “We expect that to be the norm, but it really isn’t.”
2. You can pay cash for closing costs
When you refinance, “it’s like giving out a brand new loan again,” Ostrowski said.
This means you will incur closing costs, usually including an appraisal and title insurance.
The total cost will depend on your region or state.
The average closing cost for a single-family refinanced mortgage was $2,375 in 2021, up 3.8%, or $88, from $2,287 a year ago, according to CoreLogic’s ClosingCorp, a Supplier housing closing cost figures.
Refinancing may make more financial sense if you’re able to pay them upfront instead of rolling the costs into your new loan. Some lenders may require a higher interest rate if you finance the closing costs, plus you’ll pay interest on those costs for the life of the mortgage.
“You have to be pretty careful and have a good strategy about how much 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 may have a reason to refinance. While such loans are a “great tool” for securing a home as a first-time buyer, there is a required home loan insurance premium, or MIP, which can be costly, Ostrowski said. Most new borrowers pay an annual MIP equal to 0.55% of their loan, according to government data.
“If you got an FHA loan, it might make sense to refi for a rate that’s a little bit lower if you’re going to be able to eliminate that mortgage premium,” he said.
For example, on a $328,100 FHA home loan, the homeowner would pay an annual premium of 0.55% over the life of the loan, equal to monthly payments of $150, according to calculations from Bankrate.