How to know it’s time to refinance a mortgage

Mortgage rates have been declining, making conditions favorable for some homeowners to refinance, experts say. 

The average 30-year fixed-rate mortgage was 6.58% for the week ended Thursday, Aug.14, down from 6.63% the week prior, according to Freddie Mac.

Mortgage rates have come down a point and a half from October 2023, when rates almost hit 8%, according to Jessica Lautz, deputy chief economist at the National Association of Realtors. 

“That’s a substantial improvement,” said Lautz.

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Lower mortgage rates often result in lower borrowing costs for home loans. Many homeowners have already jumped on the opportunity. 

“Refinance applications increased to their strongest pace in four weeks,” Joel Kan, vice president and deputy chief economist at the Mortgage Bankers Association, said in an Aug. 6 report. The share of refinance applications increased to roughly 42% of total applications, the highest level since April, according to the findings.

While most homeowners have mortgage rates that are too low to benefit, about 18.8% of outstanding mortgages have interest rates of 6% or higher, according to Realtor.com.

Homeowners who bought their properties in recent years when rates were high may want to consider refinancing, experts say. 

“A much more common mistake is for people to not realize when rates have dropped that they had an opportunity to refinance and to take advantage of it,”  said Chen Zhao, head of economics research at Redfin. 

Mortgage rates have been falling in recent months. In May, the 30-year mortgage rate peaked at 6.89%, according to Freddie Mac data. The rate has been on a bumpy slope since then.

That’s despite the Federal Reserve holding interest rates steady at 4.25%-4.5% since December.

The federal funds rate sets what banks charge each other for overnight lending and directly impacts borrowing and savings rates for Americans. 

Yet, mortgage rates don’t follow the federal funds rate set by the central bank. Instead, they closely track the 10-year Treasury yields, which have been declining because of recent weakness in economic data, according to experts.

“The bond market is super sensitive and it reacts immediately to the data,” said Melissa Cohn, regional vice president of William Raveis Mortgage.

There’s a possibility that the Fed cuts interest rates in September, but the bond market may have already priced in that decision, said Zhao. 

Overall, experts agree that it’s worth watching where rates are, to spot opportunities to refinance. 

“People should start paying attention to where rates are going,” said Cohn. 

As mortgage rates come down, it’s worth considering refinancing a mortgage that has an interest rate over 6%, and especially if it’s 7% or higher, experts say. 

However, before you start the process, consider your plans: refinancing makes more sense if you expect to live in or own the property for a few more years.

That’s because refinancing a mortgage is not free — there are closing costs and certain fees that come with it, and you’d want to amortize the costs over the term that you expect to be in your home, said Cohn.

If you plan to keep the home for more than a year, refinancing makes sense. But if you plan to list your house for sale in the next six months, it may not be worth it, said Zhao.

Generally, refinancing costs will depend on where you live and the size of the loan, experts say.

You can expect to pay between 2% and 6% of the new loan balance, according to Bankrate. For example, if you’re refinancing a $150,000 mortgage, you might pay from $3,000 to $9,000 in closing costs. 

You also want to make sure rates have “dropped sufficiently” for you to see real savings from the refi, said Cohn. 

There are different rules of thumb of what’s considered to be “in the money,” or when rates have come down enough. But typically, if interest rates are about 50 basis points lower than your current rate, you should look into it, Zhao said.

If it’s more than that or a full percentage point lower, “you should almost certainly refinance,” she said.