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Mortgage fees are falling, and some homeowners are in the advantage of refinancing, experts say.
According to Freddie Mac, the average 30-year fixed-rate mortgage was 6.58%, up from 6.63% for the week ended Thursday, August 14th.
Mortgage rates have been falling since October 2023, when the rate reached nearly 8%, according to Jessica Rautz, assistant chief economist at the National Association of Realtors.
“That’s a huge improvement,” Rautz said.
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A lower mortgage rate often results in lower mortgage borrowing costs. Many homeowners have already jumped at the opportunity.
“Refinance applications have increased to the strongest pace in four weeks,” Joel Kang, vice president and vice-chief economist of the Mortgage Bankers Association, said in an August 6 report. The survey results show that the share of refinance applications has increased to around 42% of total applications, the highest level since April.
According to Realtor.com, most homeowners are too low to benefit from a low mortgage rate, but about 18.8% of unpaid mortgages have an interest rate of over 6%.
Experts say that in recent years when rates were high, homeowners who purchased their property may want to consider refinancing.
“A much more common mistake is that when rates drop, people don’t realize that there’s an opportunity to refinance or use it,” says Chen Zhao, head of economic research at Redfin.
Why mortgage rates are falling
Mortgage rates have been falling in recent months. According to data from the Freddie Mac, the 30-year mortgage rate peaked at 6.89% in May. Since then, the rates have been on bumpy slopes.
That’s despite the Federal Reserve holding interest rates steady from 4.25% to 4.5% since December.
Federal fund rates set out what banks charge each other for lending overnight, which directly affects Americans’ borrowing and savings rates.
However, mortgage fees do not follow the federal funding rate set by the central bank. Instead, experts say they closely track the Treasury yields for 10 years.
“The bond market is very sensitive and responds quickly to data,” said Melissa Cohn, regional vice president of William Raveis Mortgage.
The Fed may cut interest rates in September, but the bond market may already be priced that decision, Zhao said.
Overall, experts agree that it is worth looking at where the fees are to find opportunities to refinance.
“People should pay attention to where the rates are heading,” Kohn said.
When it makes sense to refinance a mortgage
When mortgage rates drop, it’s worth considering refinancing a mortgage with interest rates above 6%, especially if it’s above 7%, experts say.
However, consider your plan before you begin the process. Refinancing makes more sense if you expect to live or own the property for several more years.
That’s because refinancing your mortgage is not free. There will be closure fees and certain fees that come with it, and you’d like to amortize the costs for the period you expect to be in your home, Kohn said.
If you plan to maintain your home for more than a year, refinance makes sense. But if you plan to list your home for sale in the next six months, it may not be worth it, Zhao said.
Generally, the cost of refinance depends on where you live and the size of the loan, experts say.
According to Bankrate, you can expect to pay between 2% and 6% of your new loan balance. For example, if you are refinancing a $150,000 mortgage, you may pay between $3,000 and $9,000 for closing costs.
Korn also said he wanted to make sure the fees were “down sufficiently” to see the real savings from Refi.
There are various rules of thumb for what is considered “inside the money” or when the fees drop quite well. But if the interest rate is usually around 50 basis points lower than the current rate, you should look into it, Zhao said.
If it’s more than that, or if the full percentage points are low, “we’re almost certainly going to need to refinance,” she said.
