Homeowners Are Refinancing Again as Rates Dip. Should You?

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Mortgage refinancing is back from the dead — type of.

As mortgage rates edge down this month, more homeowners wish to lock in a greater rate and lower their monthly payments. In comparison with this time last yr, mortgage refinance applications have increased 118%, in response to the most recent reading from the Mortgage Bankers Association. The expansion appeared to speed up recently, with week-over-week applications spiking 35% as of Aug. 9.

The uptick in activity is because mortgage rates finally began to fall in early August after strong signs the Federal Reserve plans to cut benchmark rates of interest soon. As Laurie Goodman, a housing finance policy fellow on the Urban Institute, explains, mortgage rates reflect what the markets think the Fed goes to do. In other words, future cuts by the Fed are already getting baked into today’s mortgage rates, that are hovering around 6.5% for a 30-year fixed rate loan.

So when mortgage rates began to fall earlier this month, some homeowners pounced. But Goodman notes that this can be a small group of parents who likely purchased their homes last yr when rates were at their highest point in many years.

“Remember, at the height, mortgage rates were getting near 8%,” Goodman tells Money. “Having a possibility to lock in 6.5% looks as if a very good deal relative to that.”

Is it a very good time to refinance your mortgage?

Still, the recent surge in refinancing may seem like larger than it’s, Goodman says.

“Overall, applications are very, very low,” she says. “Being up 118% off of a extremely low number — remains to be a extremely low number.”

While rates are down notably from their peak, a big majority of householders have already got rates of interest lower than today’s rates. So it doesn’t make any sense for them to refinance. In line with Urban Institute data shared with Money, over 88% of householders with outstanding mortgages have a rate below 6% as of July.

In truth, the most important share of householders, 26%, have a rate of three% or lower. These folks likely refinanced (or purchased) in the course of the pandemic when rates were historically low. At one point in 2021, rates even held below 3% for several months, in response to Freddie Mac data. Goodman called this era a “once in a lifetime opportunity.” These folks especially won’t need to refinance for a protracted, very long time — if ever.

Nonetheless, homeowners typically have a mortgage rate somewhere within the 3% and 5% range. Given where rates are today, they, too, won’t need to refinance for some time. Even the 11% of parents with mortgage rates at 6% and above should fastidiously calculate whether refinancing any time soon makes financial sense.

Goodman has a really rough rule of thumb: It normally only is sensible to refinance should you can get a latest rate at the very least 0.75 percentage points lower than your current one. For instance, should you had a 6.5% mortgage rate, using that rule of thumb, refinancing when rates dip to five.75% might be a very good idea.

While you may technically refinance your mortgage as over and over as you wish, the explanation for this buffer is because refinancing could be costly. There are closing costs — including application, origination and title fees — similar to with the unique mortgage. They’re cheaper than the unique mortgage, Goodman says, but not by much. They still typically total hundreds of dollars.

“You will have to mainly save enough [from the lower mortgage rate],” she says, “to beat those closing costs.”