With changes in mortgage rates over the last couple of years, many homeowners are asking themselves a big question: should I refinance my mortgage? Average 30-year mortgage rates have dropped over 1% since October 2023, so now might be a good time for some to consider refinancing, depending on your situation.
What’s Happening with Rates?
In September 2024, the Federal Reserve cut its benchmark interest rate by 0.5%, marking the first significant rate cut in over four years. Mortgage rates in 2024 had been trending downward before the Federal Reserve Rate cut in September 2024 but have actually gone up since the Fed rate cut.
Bankrate’s chief financial analyst, Greg McBride, recently explained that fixed mortgage rates are influenced by long-term interest rates, such as the yield on 10-year Treasury notes, both of which are shaped by expectations for economic growth and inflation. McBride also noted that mortgage rates typically adjust ahead of any actions taken by the Federal Reserve on short-term interest rates rather than in direct response to those actions.
Is Refinancing Right for You?
By refinancing your mortgage, you could lower your interest rate, reduce your monthly payments, and/or shorten the length of your loan. But whether refinancing makes sense depends on several factors, including how much you’ll save, the upfront costs involved, and your long-term plans for staying in your home.
Typically, refinancing makes sense if you can reduce your interest rate by at least three-quarters of a percentage point and recover your refinancing costs in a short period. For example, if you currently have a $400,000 thirty (30) year mortgage at 7% interest and you can now refinance to a $400,000 thirty (30) year mortgage at a 6.25% interest rate, you could reduce your monthly payment by $198 and save $3,000 in interest paid over the 1st year.
With Fed rates expected to fall further, you might be tempted to wait for an even better deal. However, timing is crucial, and waiting comes with risks since mortgage rates will not be guaranteed to drop in conjunction with the Federal Reserve, and they could even rise again like they did in September 2024.
Another factor to consider is Private Mortgage Insurance. This insurance protects the lender in case of default but adds a significant cost to monthly mortgage payments. By taking advantage of a lower interest rate or increased equity in your home, you can potentially replace your current loan with one that does not require PMI.
Calculating the Break-Even Point
One of the most critical considerations in refinancing is the break-even point: how long it will take to recover the refinancing costs. Closing costs for refinancing typically range between $2,000 - $2,500. So, if your closing costs are $2,500, refinancing reduces your monthly payment by $198, and your first-year interest savings are approximately $3,000, you’d break even in the first year. If you plan to sell your home or move before hitting that break-even point, refinancing may not be the best option. In this case, sticking with your current mortgage or exploring alternatives might be more advantageous.
Critical Considerations
The decision to refinance depends on your unique financial situation, long-term plans, and how much you stand to save. Some of the most critical considerations include the following:
Evaluate your current mortgage: Compare your existing interest rate with current rates to see if refinancing offers significant savings.
Consider your timeline: Refinancing could be wise if you plan to stay in your home for several more years. But if you anticipate moving before you reach your break-even point, it might not be worth the cost.
Consult a professional: Speak with a loan officer to understand your options and determine whether refinancing is right for you.
We’re here to help guide you through the refinancing process and ensure you make the best decision for your financial future. For personalized advice and to explore your refinancing options, contact Lisle Savings Bank today.