Mortgage rates dropped below 3% for the first time since February last week — good news for homeowners looking to refinance.
Experts don’t expect this to continue for the long term, so this latest drop could present one more window of opportunity for homeowners who haven’t already secured a lower interest rate with a refinance over the past year. “I don’t see this as a trend, I see it as more of a roller coaster,” says David Fiorenza, assistant professor of practice in economics at the Villanova School of Business.
Even though we haven’t had that steep of a drop in rates over a similar time frame since last spring, during the early days of the lockdown, don’t expect the record lows we saw in 2020.
What Do the Current Mortgage Rate Trends Mean for Your Plans to Refinance?
Rate changes are typically more impactful when you’re refinancing, as opposed to getting a mortgage for a home purchase. This is because a homebuyer can adjust what they offer to account for interest rate changes.
Whether it makes sense to refinance is a more straightforward proposition: it depends on if you can get a low enough interest rate to offset the upfront costs.
A good rule of thumb is the 1% rule. If you can reduce your mortgage rate by 1%, the savings can make refinancing worthwhile — although you should always do the math for your personal circumstances. Try it yourself by using our mortgage refinance calculator.
In February and March of this year, the rate spiked 0.45%, which put a big dent in demand for refinance loans. Now, the recent decline of 0.21% has wiped out nearly half of that gain.
The average mortgage balance was around $208,000 in 2020. Here’s how much the 30-year mortgage rate increase and the subsequent decrease could save someone looking to refinance now, instead of a month ago.
|Loan Term||Loan Balance||Starting Rate||Rate Change||Change in Monthly Payment||Change in Total Interest|
Keep in mind, these numbers are based on average rates. But if you have an excellent credit score (740+) and a loan-to-value ratio (LTV) at 80% or lower, you may be eligible for even lower rates.
“I’ve got somebody that’s getting a 30-year fixed [loan] at 2.75%,” says Jim Sahnger, mortgage loan originator with C2 Financial. And the opposite is true, if your credit score is hurting. “But, other people I’ve quoted are well over 3%.”
If you opt for a shorter-term loan, such as a 15-year mortgage, your rate will drop even further. “You can get a 15-year mortgage for around 2.125%, which is really good,” Fiorenza says. The tradeoff is that, even with the lower rate, the monthly payment on a 15-year $208,000 refinance would be roughly $477 higher than a 30-year loan at today’s rates.
With home prices increasing, now could also be the right time to consolidate high-interest debt with a cash-out refinance. “I’ve got one person I’m working with, when you take all their debt into account, [a cash-out refinance] going to cut their monthly payments by over $1,000,” Sahnger says. “And that’s with an interest rate that’s very similar to what they had.”
How long you plan to keep your mortgage will impact whether or not the savings will outweigh the closing costs. To calculate if it makes sense, take the total upfront fees and divide it by the amount you’re saving each month. If your closing costs were $8,000 and you’re saving $300 a month, then it would take roughly 27 months (just over two years) to break even.
Where Could Mortgage Rates go From Here?
Moving forward, it’s probable we’ll have the normal push and pull on rates, but don’t anticipate extreme highs or lows. “I think we’re going to have a series of months that are going to be similar to what we’ve had over the last couple of months,” Sahnger says. “You’ll have some fluctuations where [mortgage rates] will be up or down by a quarter of a [percentage] point from where we currently are.”
A healthy economy typically means rising rates, and there are signs that the economy is beginning to turn a corner. Initial unemployment claims dropped to their lowest level during the pandemic, and all adults in the U.S. are now eligible to receive a Covid-19 vaccine. However, we still have a long way to go to get back to a pre-pandemic economy. So don’t expect mortgage rates to skyrocket, as there are counterbalances in play.
But the bottom line is, when you look at the history of mortgage rates, it’s still an excellent time to lock in a rock-bottom rate.