In 2023, homeowners have been hesitant to refinance their mortgages due to high mortgage rates and benchmark interest rates. Compared to the low refinance rates of 2020 and 2021, it didn't seem worth it for many homeowners to take action. However, there has been a recent change in the interest rate environment. While rates are still higher than before, they have significantly decreased in recent weeks. The Federal Reserve's decision to leave interest rates unchanged this week suggests that rates may continue to decline before a potential rate cut in 2024. This raises the question of whether homeowners should refinance now or wait for a better opportunity.
The first compelling reason to refinance is that rates are lower than before. As of December 14, the 15-year refinance rate is at 6.61%, down from around 7% in October. If a homeowner has a mortgage rate higher than the current rate and is comfortable with a condensed repayment period, it may be beneficial to refinance. However, experts advise against refinancing unless there is at least a one percentage point reduction in the current rate. It is also important to consider the length of time needed to break even on the closing costs of refinancing. If the homeowner does not plan to stay in the current home long enough to recoup the closing costs, refinancing may not be financially beneficial.
The second reason to consider refinancing now is the improving outlook. Although refinance rates are not as low as they were in 2020, they are gradually improving month-over-month. With inflation continuing to cool and the Federal Reserve keeping interest rates unchanged, there is a possibility that rates could further decrease in the near future. Therefore, homeowners should start exploring lenders and rates to be prepared for potential opportunities.
The third reason to refinance is that it can improve one's financial situation. In addition to the potential savings from a lower rate, refinancing can also provide predictability by switching from an adjustable-rate mortgage to a fixed-rate one. This prevents future rate hikes and allows for more stability in budget planning. Furthermore, refinancing can help eliminate private mortgage insurance (PMI) that may have been added if the initial loan was obtained without a 20% down payment.
In summary, with interest rates on pause, it is a good time for Americans to consider making financial moves. Refinancing a mortgage can potentially lock in a lower rate and/or shorten the loan term. Even if it may not be the absolute best time to refinance, the overall economic outlook is improving, making it likely that better opportunities will arise. Additionally, refinancing can provide more predictability in budgeting and the opportunity to eliminate PMI. Therefore, homeowners should seriously consider refinancing their mortgages now.
