The August Intercontinental Exchange (ICE) Mortgage Monitor reveals that refinancing might be worthwhile for two million homeowners, and 3 million could soon benefit.
ICE defined a refinance as worthwhile if a homeowner can drop their rate by 0.75%, or from 7.25% to 6.5%, for example.
Refinancing to a better mortgage rate means lower monthly payments. However, refinancing comes with closing costs, which is why borrowers don't do it every time mortgage rates fall. There is a break-even point where lower monthly payments outweigh the closing costs.
A 0.75% rate drop could be enough to entice many homeowners to refi, despite costs.
Recent Mortgage Rate Drop Puts 3 Million Homeowners Near Refi Striking Distance
Reigning mortgage rates are crucial in determining when to refinance. At the start of August, ICE reckoned only 1.6 million homeowners would then benefit from refinancing after allowing for closing costs. But that number has risen to more than 2 million this month because mortgage rates have fallen since then.
"If mortgage rates fall below 6.375% later this year — as implied by futures prices in early August — that number would climb above 3 million, providing increased refinance-related opportunities to both lenders and homeowners," says the latest Mortgage Monitor. "In fact," it continues, "if 30-year rates fall to 6.125%, some 4.8M mortgage holders would be in the money for a refinance."
This morning, average rates for 30-year, fixed-rate mortgages (the ones we quote throughout this news story) were down to 6.45%, according to our data, sourced from ICanBuy.
So, in the simplest terms, the lower mortgage rates fall, the more homeowners stand to gain by refinancing to a lower rate.
You can see why. Mortgage rates peaked at 7.79% in October 2023, says Freddie Mac. If a borrower's mortgage dated from then, they could slice 1.34% off their current rate by refinancing to today's 6.45% rate.
With FHA loan rates at 5.77% this morning, someone could save $220 per month and about $79,248 over time by refinancing today an existing $250,000 FHA loan.
How Do I Know if I Should Refinance?
The math will decide whether now is a good time for you to refinance. The only way to be sure is to run the numbers using a refinance calculator — or ask a trusted professional (or even good AI bot) to run them for you.
Remember to allow for closing costs and the hassle of refinancing. Government-backed mortgages (FHA, VA and USDA loans) offer streamline refinances which can significantly reduce both the closing costs and hassle. These may not require an appraisal or credit check.
Fannie Mae's refinancing options and Freddie Mac Refi Possible® can also make refinancing more attractive.
These types of refinances are known in the industry as "rate-and-term" ones. You reduce your rate to lower your monthly payment, and/or you change your term.
Extending your term should reduce your monthly payments. Shortening your term typically delivers a different benefit: You increase your payments but reduce your total cost of borrowing, because you're paying interest for a shorter period.
What’s the Difference Between Rate-And-Term Refinance and Cash-Out Refinances?
A cash-out refinance gives the borrower excess refinance proceeds after paying off the underlying loan. For example, a $300,000 refinance paying of a $250,000 loan gives the borrower $50,000 at closing, less closing costs.
A rate-and-term refinance does not give the borrower cash, but reduces the rate or changes the loan length, otherwise known as the term.
Cash-outs have surged in popularity recently, accounting for 59% of all refinances in the second quarter of this year. And they are great for those who need a quick injection of cash.
However, rate-and-term refinancings are intended to provide tangible benefits for borrowers that don't include cash in their pockets. Instead, they get a lower rate and monthly payment or a smaller total cost of borrowing.
Cash-out refinances typically come with higher rates than rate-and-term ones, and are often more difficult to get.
All forms of refinances are designed to assist borrowers in meeting their financial needs. And falling mortgage rates are allowing millions to access that help.
Will Rates Rise?
Just don't bank on that happy situation lasting long. Of course, it might, if current economic trends continue. But any appreciable rise in inflation or an increase in general borrowing costs could soon see mortgage rates heading higher again.
So, if you want to seize a benefit from refinancing, it's a good idea to start talking to lenders now.
