Mortgage Rates Just Dropped. Time To Fight Rampant Inflation With a Refinance?

If you bought a home after September 2022, you might be in a position to refinance and potentially save some money each month. According to fresh data from Freddie Mac, mortgage rates are now hovering around 6.35% for a 30-year fixed mortgage, as of September 5, 2024.

With rates now lower than most of the last two years, refinancing could be a valuable opportunity to reduce your mortgage payments and free up some room in your monthly budget.

Let’s dive into why this is happening, how refinancing could benefit you, and what it means for your family’s finances.

Why Now Might Be the Time to Refinance

Consider this scenario: If you bought your home in November 2023, you likely secured a mortgage at around 7.76%, which was the average rate reported by Freddie Mac at that time. Now, with rates down to 6.35%, you could be looking at a reduction of around $340 per month on a $360,000 loan, simply doing the math on the above figures (keeping in mind that these are all averages). That’s a meaningful amount of extra cash that could go toward other expenses, investments, or even a rainy-day fund.

Although 6.35% might not seem low compared to the sub-3% rates of 2020, it’s a significant improvement for most mortgage shoppers who locked in rates during 2022 or 2023. For many homeowners, refinancing could mean a sizable cut in their monthly mortgage payment.

But refinancing isn’t just about lowering your rate. There are several reasons why a homeowner might choose to refinance, and understanding these options is key to making the best decision.

What Exactly Does a Refinance Do?

Refinancing replaces your existing mortgage with a new one that typically has better terms. The most common reason homeowners refinance is to take advantage of lower interest rates, but that’s just one of many potential benefits.

For example, you might refinance to:

• Change from a 30-year mortgage to a 15-year one, paying off your home faster.
• Tap into your home’s equity for cash, which can be used for renovations, debt consolidation, or other needs.
• Remove private mortgage insurance (PMI) if you now have enough equity.
• Switch from an FHA loan to a conventional loan, which can offer better terms and fewer restrictions.

It’s important to note that while refinancing can be a smart financial move, it’s not without costs. Closing costs for a refinance can run from 2% to 5% of your loan amount, though you can often roll these costs into your new loan. However, doing so reduces your home’s equity and increases the total interest paid over time.

How Refinancing Could Be a Lifeline in Today’s Inflationary Environment

With inflation hitting households hard, many families are finding it tougher to make ends meet. Prices for essentials like groceries, gas, and utilities have surged over the past few years. According to the U.S. Bureau of Labor Statistics, the consumer price index (CPI) rose by 6.1% from July 2022 to July 2024. So a family spending $2,000 per month on food, gas, and other essentials in 2022 now spends $2,123 for the same goods.

Imagine reducing monthly spending with a refinance.

In this challenging environment, reducing your mortgage payment through refinancing can provide much-needed relief. Every dollar saved on a mortgage can go toward offsetting the rising cost of living. If your current mortgage rate is significantly higher than today’s average, it might be time to explore refinancing as a way to reclaim some financial breathing room.

How to Determine if You’re in a Good Position to Refinance

To find out if refinancing is right for you, you first need to know your current mortgage rate. If you’re unsure, you can check recent mortgage documents, such as your closing paperwork or your monthly mortgage statement. Many lenders also allow you to access this information online.

Once you know your rate, you can compare it to current market rates. If today’s rates are at least 0.50-1.0% lower than your current rate, refinancing might be worth considering (the larger your loan balance, the less you need to drop your rate to potentially make it worth it). The savings could outweigh the costs associated with the refinance, especially if you plan to stay in your home for several more years.

Try our refinance calculator. By inputting your current loan details and the new rate you’re considering, you can get a clearer picture of how much you might save each month—and how long it will take to recoup the closing costs.

Will Rates Keep Dropping?

It’s tempting to wonder whether you should refinance now or wait to see if rates drop even further. After all, the Federal Reserve has been cutting interest rates in response to slowing inflation and signs of a cooling economy. According to Forbes, inflation has already started to soften, and many experts believe the Fed will continue to lower rates as 2024 progresses.

While this may indicate that mortgage rates could fall further, there’s no guarantee. In fact, rates might stay relatively steady or only decrease marginally. Given that no one can predict the future with certainty, trying to time the market by waiting for the perfect rate can be risky.

For most homeowners, it’s worth considering a refinance if the current rate represents significant savings, especially in the context of today’s elevated inflation. Holding off for a slightly better rate could mean missing out on months or even years of potential savings.

The Costs of Refinancing: What to Watch For

Refinancing can be an excellent way to reduce your mortgage payment, but it’s important to be aware of the costs involved. As mentioned earlier, closing costs for a refinance can range from 2% to 5% of your loan amount. For a $360,000 mortgage, that means paying between $7,200 and $18,000 in closing costs.

These costs can typically be rolled into the new loan, but this will increase the loan balance and the interest paid over the life of the loan. Additionally, refinancing resets the loan term, so if you’re three years into a 30-year mortgage, refinancing effectively makes it a 33-year loan.

However, if you need immediate financial relief, refinancing can still be a wise move. Lowering your monthly mortgage payment can free up cash for other expenses or even help you avoid missing payments and damaging your credit score.

Is Refinancing Right for You?

Refinancing can offer substantial savings, especially for those who purchased homes in the past few years when rates were higher.

With inflation still a factor and mortgage rates fluctuating, refinancing might just be the financial break your family needs.