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MoneyWatch: Managing Your Money
By Jake Safane
Edited By Matt Richardson
/ CBS News
The most recent inflation data shows that in January prices rose 3.1% year over year. That's a significant improvement from when inflation spiked to over 9% in 2022, though it's still above the Federal Reserve's 2% target.
Amidst this backdrop, many real estate experts predict that mortgage rates will drop somewhat this year from their current levels in the mid-6s for 30-year fixed-rate mortgages, but perhaps not by much.
If rates fall by 1%, would that be enough movement to make it worthwhile for current homeowners to refinance their mortgages? Or would rates need to fall further? That's the question we proposed to some experts.
Considering a mortgage refinance? See what rate you could qualify for here now.
Is a 1% drop in mortgage rates worth refinancing?
For starters, a 1% drop in mortgage refinancing rates doesn't mean that you could lower your existing interest rate by 1%. If you locked in a mortgage during the pandemic at around 3%, then refinancing to, say, a 5.5% mortgage if rates drop 1% from current levels could mean your mortgage gets more expensive.
However, a mortgage refi could still be worth it, such as if you do a cash-out refinance that allows you to tackle other debt.
"Some of these homeowners may be looking to consolidate their high credit card debt, and many of them likely have a significant amount of equity in their homes. Refinancing may help them save a lot of money per month," says Christy Bunce, president of New American Funding.
Refinancing could also help you pull cash out of your home's equity for things like renovations, adds Bunce.
And if you're in a situation where you can lower your mortgage rate by 1%, such as if you bought your home in 2023, then a mortgage refinance loan could be even more worthwhile. However, you need to do the math by looking at the interest rate, mortgage refinancing costsand the amount of time you plan to keep your home.
"Let's consider a scenario where a 1% drop in rate saves you $200 in monthly payment, but to get that rate, you need to pay $8,000 in closing costs. That means it would take you 40 months of monthly savings just to recover the upfront cost," says Shashank Shekhar founder and CEO at InstaMortgage.
But if you plan to stay in your home for more than that amount of time, refinancing could be worthwhile. And you might be able to shrink that timeline by finding a mortgage refi with lower closing costs.
"Sometimes, even a very small drop in rate with little-to-no closing cost can be beneficial," says Shekhar.
Explore today's mortgage refinance rates here to see if makes sense for you.
Other considerations to know
If you don't have other debt to consolidate and you're not looking to tap into your home's equity, then a 1% drop in mortgage rates probably isn't worth it if doing so raises your mortgage interest rate. But if you can save money, it may be valuable.
"It will come down to how long the homeowner plans on staying in the house," says Neil Christiansen, home loan specialist and Certified Mortgage Advisor at Churchill Mortgage.
"For example, if the recoup time, after dropping their rate 1%, took 4 years to recoup but they knew their plan was to be in the house for at least 10 years, it would make sense to consider paying the fee. The opposite will hold true if their stay is anything less than the calculated recoup time. The cost would outweigh the benefit," he adds.
Why homeowners may want to refinance this year
If mortgage rates drop this year as predicted, then that could make refinancing more attractive to homeowners in 2024, especially those who were homebuyers in the latter half of 2023.
"From August 2023 through December 2023, rates were over 7%, according to Freddie Mac. At their peak in October, rates were at 23-year highs at 7.8%. If rates were to drop by 1%, we could see a significant amount of refinancing," says Shmuel Shayowitz, president and chief lending officer at Approved Funding.
Even if rates fall by a more modest amount, refinancing could be worthwhile, especially if you can find one with minimal closing costs.
"When determining if one should refinance, I believe it needs to be discussed anytime rates drop at least .5% when compared to their existing rate," says Christiansen. "If a homeowner can reduce their mortgage rate for minimal fees or in some cases zero costs, refinancing should be a high priority."
Even a slight reduction from the existing rate to the current rate could result in hundreds of dollars in savings each month.
So, for example, being able to save over $250 per month with a 1% drop in mortgage rates could make refinancing very attractive. But if closing costs eat into that too much and you don't plan on keeping your mortgage for long enough to overcome that, then you might be better off waiting.
Not sure if mortgage refinancing is worth it for you? Crunch the numbers and find out here now.
