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It’s still uncertain when the Federal Reserve will start reducing interest rates. However, many homeowners who secured mortgages when rates were between 6% and 8% are closely watching for a chance to refinance at a lower rate.
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- Homeowners should consider refinancing if rates drop by at least 50 basis points from their current level, predicting potential savings.
- Knowing the initial costs, such as closing fees, is crucial for homeowners to assess the financial advantages of refinancing.
- Refinance your FHA loan to eliminate costly mortgage insurance and lower monthly payments!
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Is It Time to Refinance Your Mortgage? Top 3 Tips to Know!
Due to these high rates, refinancing in 2023 fell to its lowest in three decades. Data from Freddie Mac, which buys mortgages from banks, shows that refinance loans totaled only $75 billion and $80 billion in the first and second quarters of 2023, respectively.
Jeff Ostrowski, a housing expert at Bankrate, said, “With the significant increase in rates over recent years, there’s been a sharp drop in refinancing.”
Freddie Mac reports that refinancing activity increased by 2.9% in February from the previous year. However, many homeowners might not choose to refinance their mortgages because they have already secured historically low rates, or they might not see enough benefit in doing so, according to predictions from the mortgage agency.
As homeowners predict potential Federal Reserve rate cuts and their potential impact, here are three indications that refinancing could be a wise decision:
- Significant Rate Drops by 50 Basis Points
Chen Zhao, a senior economist at Redfin, suggests that the timing for refinancing your mortgage largely depends on when you initially secured your loan. While many experts recommend waiting for a full percentage point decrease to refinance, even a drop of 50 basis points (0.5%) from your current rate could justify considering this option.
If you notice a half-percent drop in interest rates from what you’re currently paying, talking to your lender or loan officer might be worthwhile. They can help you weigh the benefits against the costs, how much you might save each month, and how long you plan to stay in your home to see if refinancing makes sense for you.
Zhao points out that while there are costs involved in refinancing, these are generally small when compared to the potential long-term savings. However, she cautions that with the current economic climate, interest rates are not expected to drop much below 6% soon.
Veronica Fuentes, a financial planner at Northwestern Mutual, adds that homeowners should adjust their expectations regarding interest rates. While historically low rates around 2% to 3% were common during the early COVID-19 pandemic, such rates are not typical. The current economic conditions mean higher rates are more likely for the foreseeable future.
- You have the Cash for Upfront Costs
Jeff Ostrowski explains that refinancing is essentially applying for a new loan, which brings with it various closing costs such as appraisal fees and title insurance. These costs can vary depending on where you live.
In 2021, the average closing cost for refinancing a single-family home was $2,375, a slight increase from $2,287 the previous year, as reported by CoreLogic’s ClosingCorp. This company tracks real estate closing expenses. It’s financially smarter to pay these costs upfront rather than adding them to your loan amount. Financing these costs might lead to higher interest rates from lenders, and you’ll end up paying interest on these additional costs over the life of your loan.
Ostrowski advises being careful and strategic about how much you’ll save and whether refinancing under these conditions makes financial sense.
- Refinancing with an FHA Loan
If you have an FHA loan, refinancing could be beneficial. FHA loans are helpful for first-time homebuyers because they allow a lower down payment, but they come with a mandatory mortgage insurance premium (MIP), which adds to the cost.
This MIP is typically 0.55% of the loan amount each year. For instance, if you have a $328,100 FHA loan, you pay about $150 monthly just for MIP.
Jeff Ostrowski from Bankrate suggests that even a slightly lower rate through refinancing could be worth it if it means eliminating the MIP. This could significantly reduce your overall monthly mortgage payment.
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