Mortgage rates are falling. Should you refinance your home now?
After inflation hit a 40-year high last year, the Federal Reserve responded with a series of aggressive rate hikes aimed at tamping it down. That led to the benchmark interest rate range hitting a 22-year high between 5.25% and 5.50% in July. While higher rates are welcome for savers with high-yield savings and certificates of deposit (CD) accounts, they've been particularly troublesome for borrowers. For example, prospective homebuyers and owners looking to refinance have been forced to sit on the sidelines as they saw mortgage rates hit their highest point since 2000.
But in recent months, inflation has cooled (it sits at 3.2% currently) and interest rates have been paused. This has led to a slight reduction in mortgage rates and has left many owners wondering if now is finally the time to refinance their homes. While today's rates are still exponentially higher than they were in 2020 and 2021, they may be low enough for some to consider refinancing now. So who should consider acting? That's what we'll break down below.
Not sure what refinance rate you'd qualify for? Find out here now.
Who should refinance their mortgage now?
The average 30-year mortgage rate, as of December 6, 2023, is 7.43% — while 15-year refinance rates are significantly lower, sitting at 6.80% currently. While that may not be many people's idea of a bargain (especially when rates hovered around 3% a few years ago), for some borrowers, it can make sense to refinance now. For context, at the start of November, those rates were 8.06% and 7.20%, respectively. Specifically, the following three owners may want to start the process of a mortgage refi:
Owners with high mortgage rates
One of the primary reasons to refinance is to pay less each month by paying a lower interest rate than you had previously secured. So if you have a rate higher than what's currently available, you may be able to start saving by refinancing to the lower prevailing rate. That said, there are two caveats to keep in mind. If you refinance to a lower rate but an expedited loan term (think 15 years instead of 30), you'll actually increase your mortgage payment because you condensed the amount of time you had to pay off the loan. So crunch the numbers before doing so.
Owners who are looking to refinance should also know the closing costs for doing so. It could take years to recoup that cost and, if you sell your house before breaking even, you'll have lost money in the process. So only consider refinancing on a property that you plan on keeping long enough to surpass the refinancing closing costs.
Learn more about your mortgage refinancing options online.
Owners who have private mortgage insurance
Private mortgage insurance, otherwise known as PMI, accompanies home loans in which the borrower initially puts down less than 20% toward their loan. If you've since paid down your mortgage enough to have 20% equity in the home, then you may qualify to refinance and have the PMI removed from your monthly payment.
Simply compare what you're paying with the PMI to what you would pay by refinancing to determine if it's worth it for you. And remember that the same caveats mentioned above still apply here.
Owners who have an adjustable-rate mortgage
An adjustable-rate mortgage, otherwise known as an ARM, can be beneficial for borrowers at the start of their loan term when rates are lower. But when they increase — and they will increase — it can become increasingly difficult to make ends meet. So if you have an ARM and are tired of the higher rates and unpredictable nature of the loan, you may want to refinance to a fixed rate instead, even at today's elevated rates.
By doing so you'll inject some predictability into your budget by knowing exactly what you'll be paying from now until the mortgage is paid off. Simply review the amortization schedule to know exactly where you stand and exactly what rate you'll have for the remainder of your loan.
The bottom line
Mortgage refinancing made sense for millions of Americans during the height of the pandemic when rates were very low. While that benefit has dimmed significantly since, there has been some hope in recent weeks, as rates have ticked down a bit. For owners who currently have a very high rate, it may be worth acting now. Similarly, those who want to rid themselves of their PMI or those who want to refinance into a fixed-rate mortgage may find that today's rates, while not perfect, are still beneficial for their unique circumstances. As usual, however, be sure to crunch the numbers and read the fine print to make sure that a mortgage refinance is worth it for you — and that the costs of getting there don't outweigh the long-term benefits.
Not sure if a mortgage refinance is worth it for you now? Review your options here to learn more.
