The number of homeowners who could potentially refinance their mortgages is growing almost daily as the clock ticks down to the Federal Reserve Board’s possible rate cut next week.
The conforming 30-year fixed mortgage rate was 6.36% as of Monday, Sept. 8, according to ICE Mortgage Technology, favorable enough for some 3.1 million borrowers to refinance should they decide to pull the trigger.
The last time rates were this low was October 3, 2024, ICE noted.
There’s no doubt that many owners are chomping at the bit to obtain lower rates. But is it wise to do so now or wait a little while longer for rates to come down even further?
ICE defines “in-the-money” to mean rates would have to fall by 0.75 basis points before it becomes economical for a borrower to refinance. Rates hit a peak on Oct. 26, 2023 at 7.79%. So far this year, rates were at their highest on Jan. 14, when they stood at 7.02%, but for the most part, they’ve been under 7% ever since.
So for it to be worthwhile to refi, rates will have to come down a bit further — which begs the question, how many people took out financing at the very top of the market, and how many have loans at rates that are not yet feasible to turn in?
While the rule of thumb used to be that rates would have to fall by half-a-point for refinancing to become feasible, a recent study by Neighbors Bank agrees with ICE’s in-the-money definition. And it says the main issue is how much money it will cost borrowers to do so.
Exactly how much it costs, however, depends on the lender. The exercise makes sense only if the borrower plans to remain in the house — and keep the new loan — for longer than it takes to recoup that expense in the form of monthly savings.
For example, if it costs $4,000 to refinance but you save $200 a month in doing so, it would take 20 months to break even. After that, you’re saving money. But before that, refinancing is a waste of time and money.
Borrowers should do the math, and their loan brokers can help them do that. Right now, it seems too many recent buyers are “betting the house,” purchasing home while wagering that the rates they are paying will come down so they can refinance.
A survey of 1,000 buyers by Truework, a platform that delivers verification reports to lenders, found that more than half are buying now in hopes that rates will come down enough to refinance.
“Today’s homebuyers are increasingly desperate for a return to lower interest rates, with many who have recently purchased a home hanging their hopes on future refinancing to lower their monthly payments,” said the company’s Victor Kabdebon. “That could be a very risky move if it doesn't happen — and most analysts predict it will not anytime soon.”
The Neighbors Bank study gave it three years and found it would take a drop of at least 0.6 points before refinancing would deliver clear gains within a reasonable time frame.
The Clarence, Mo.-based institution based its findings on this scenario: The owner has a 30-year fixed-rate mortgage at 6.8% with a loan amount of $386,339. It would cost $5,458 in loan fees and other closing costs to replace the loan with another at a lower rate.
If this fictional borrower refinanced after rates fell just 0.25 points, he’d still be in the hole $2,424 after three years. That is, after 36 months, he’d still be out-of-pocket that much more than he’s saved by refinancing.
With a half-a-point decline, he’d break even in 3.08 years. With a drop of 0.75 points, the break-even point dips to just under three years. But if rates slid by a full percentage point, the homeowner would recoup the cost in 20 months and net $4,764 in savings after three years.
“Many assume that any drop in rates is enough to justify refinancing, but the math tells a different story," said Jake Vehige, president of mortgage lending at Neighbors Bank.
"Unless you're seeing a significant drop, refinancing may not make sense right away,” Vehige added. “The break-even point isn't just about the rate. It's about how long you plan to stay in your home, how much you pay upfront, and where you live.”
Where buyers reside is something they rarely take into consideration, but it counts, too. High-cost housing markets tend to offer the highest five-year savings because larger loan amounts magnify the impact of even a small rate cut.
Based on the bank’s analysis, people in every state eventually break even if they keep the house for five years. But the amount saved depends greatly on location.
For example, borrowers in New Hampshire, who have an average loan amount of $430,247, net nearly $3,000 more in five-year savings after refinancing at a 0.5-point rate drop than those in Louisiana, who have an average loan amount of $252,075.
Savings also vary with the type of loan and its duration. And borrowers with shorter loan terms and with conventional mortgages tend to realize refinance savings more quickly.
Those with 15-year mortgage holders break even faster and accumulate more savings than those with 30-year loans when rates drop by the same amount, the Neighbors Bank study found.
A 15-year loan requires larger monthly payments but saves significantly on interest over time. That interest advantage carries over to refinancing, the study explains, because 15-year borrowers pay down principal faster and, therefore, recoup their refinancing costs much sooner.
With a half-point rate drop, for example, a typical 15-year borrower would see $1,350 in net savings after three years, while a 30-year borrower would still be $184 in the red.
Refinancing conventional loans also outperforms government-back FHA, VA, and USDA mortgages, largely because of lower insurance premiums and fewer associated fees.
With a government loan, borrowers trade smaller upfront costs for higher interest expenses over the life of the loan, the study says.
With a refinance, that trade-off carries through. Conventional borrowers generally realize greater long-term savings, while government-backed borrowers see more upfront relief — but smaller cumulative gains.
There are other reasons, of course, to refinance. If you want to access equity you’ve built up in the house, lower your monthly by extending your loan’s term, or want to switch out of an adjustable-rate loan into one with a fixed rate that never changes, refinancing might make sense.
But borrowers who are contemplating refinancing purely to save money should do the math. It may surprise them. “Modest rate improvements,” noted Neighbors Bank, “still require a multi-year commitment before refinancing truly offsets” the cost.
