This week the Freddie Mac 30-year fixed interest rate averaged 6.35%.
Sam Khater, Freddie Mac’s chief economist, noted the 15 basis point-drop from last week was the largest weekly drop in a year.
There were 3.1 million homeowners “in the money” on a refinance as of Sept. 9, according to Andy Walden, head of mortgage and housing market research at Intercontinental Exchange.
Most likely these are folks carrying fixed-rate mortgage interest rates in the high-6% and 7% range.
Conventional wisdom believes the Federal Reserve is going to cut interest rates three times before the end of the year. The first cut will carve out one-quarter percent at the Sept. 16-17 meeting. Cut number two will come in October, with the third cut at the December meeting.
All of this begs the question: Should you wait to refinance as rates are about to head lower? Or should you pull the trigger now, assuming you are “in the money?”
The mortgage market has already priced the expectation of next week’s Fed rate cut. So, mortgage rates might not fall farther (for this round).
Separately from the timing issue, which I will also address today, there are two ways to look at an interest rate reduction refinance. These rules would not apply to a cash-out refinance as cash-out borrowers are motivated by the cash, not necessarily the interest rate.
The first rule is factoring in the costs of the refinance divided by the monthly savings. That tells you how long it will take to break even.
For example, say you are a well-qualified borrower with a $750,000 mortgage balance at a 7.125% interest rate. The current principal and interest payment is $5,053.
You can get a 5.75% interest rate with 1 point cost (1 point is 1% of the loan amount) plus related settlement charges of $4,500. Your new loan amount is roughly $762,000. Your new principal and interest payment at 5.75% is $4,447. The difference between the old payment of $5,053 and the new payment of $4,447 is $606 monthly. Take the $12,000 in refinance costs and divide that by the $606 savings. It will take 20 months to break even.
If you can break even in 36 months or less, so long as you aren’t going to sell the property within that time, it makes sense to refinance.
Example number two is a no-cost loan.
This means you accept a rate higher than 5.75%, but the lender covers all the closing costs by upselling it.
Using the same $750,000 example you can get a no-cost refinance at 6.625%. The principal and interest payment on a $750,000 loan is $4,802. Subtract $4,802 from $5,053 and you immediately save $251 per month. The only cost for you is your time. Not bad. It beats a poke in the eye with a sharp stick.
If you are doing a no-cost loan, you don’t need to time anything. You just do the refinance. If rates in general come down more through future Fed cuts, you keep going with new, no-cost refinances, say every six months. This is commonly called a serial refinancer.
As an aside, mortgage loan originators can have their compensation clawed back by the lender if the mortgage pays off in less than six months. So, MLOs are not really motivated to refinance you in less than 180 days.
For the borrower who is paying closing costs to buy the rate down to 5.75%, timing is a tougher decision. On the one hand, it’s a sure thing. You are saving $606 per month, breaking even in 20 months.
On the other hand, let’s say you wait six more months, and mortgage rates continue to slide, presenting a very attractive 5.25% rate. Your new principal and interest payment on $762,000 is $4,208. In this example, six months later, you are saving $845 per month ($5,053 minus $4,208). Take the $12,000 in costs divided by the $845 monthly savings, it takes just over 14 months to break even.
Mortgage rates could also go up. There are no guarantees about the direction of mortgage interest rates though. The U.S. could see some bad tariff-related inflation numbers, for example. That could trigger a sell-off in the bond market, which means mortgage rates could soar.
My best advice is to go with the no-cost loan because you are just riding the rates down without cost. This also keeps you safe from an event that you guess wrongly about the bottom of this interest-rate downturn.
Something else to consider: I often hear the argument that the borrower is restarting again at 30 years when he or she refinances. That’s true. But you could have your loan amortized for 28 years if you are already two years in. It’s still less expensive over the life of the loan, even if you cut the term to 28 years. Your lender will accommodate you.
The bottom line is all you are doing is renting money. Why pay a higher rate on the rent if you don’t have to?
Freddie Mac rate update
The 30-year fixed rate averaged 6.35%, 15 basis points lower than last week. The 15-year fixed rate averaged 5.5%, 10 basis points lower than last week.
The Mortgage Bankers Association reported a 9.2% mortgage application increase compared with one week ago.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $806,500 loan, last year’s payment was $78 less than this week’s payment of $5,018.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.25%, a 15-year conventional at 4.99%, a 30-year conventional at 5.75%, a 15-year conventional high balance at 5.375% ($806,501 to $1,209,750 in LA and OC and $806,501 to $1,077,550 in San Diego), a 30-year high balance conventional at 6.125% and a jumbo 30-year-fixed at 5.99%.
Eye-catcher loan program of the week: A 30-year mortgage, fixed for the first five years at 5.375% with 30% down payment and 1 point cost.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com.
