According to Senior Economist Jake Krimmel of Realtor.com, refinancing might not be beneficial for the majority of homeowners who intend to relocate soon.
Knowing whether a move passes a rule known as the “breakeven point,” which examines whether upfront expenditures are outweighed by the savings from a lower rate, is crucial to refinancing, he said.
“Loan size, remaining term, and, most importantly, how long the borrower plans to stay in their home all matter,” Krimmel said, noting that “a rule of thumb is closing costs divided by monthly savings.”
Even though the Federal Reserve lowered interest rates for the third time in a row, this does not guarantee a decrease in mortgage rates. Rates closely follow the yield on the 10-year Treasury but are not directly impacted by the Fed’s interest rate decisions.
Economists anticipate a minor decline in mortgage rates, with rates expected to linger around 6.3% next year, despite regulators’ indication that there might only be one rate cut in the upcoming year as rates approach a neutral level.
According to Krimmel, this drop raises concerns about refinancing even if it isn’t significant—it is only down from its average of 6.6% in 2025.
Housing Affordability Crisis Hindering Americans, Will Refis Help?
Homeowners must still pay closing costs on the new loan when refinancing, so it’s crucial that the savings from lower monthly payments eventually exceed those expenses, according to Krimmel.
According to Krimmel, refinancing only makes sense when the new mortgage rate is between 0.5 and 1 percentage point lower than the homeowner’s current rate because it gives sufficient savings to cover the refinancing charges.
Refinancing would cost them money because the majority of homeowners today have mortgage rates that are significantly lower than current market rates. This is what’s usually referred to as the “lock-in” effect. Today, for instance, only those with a mortgage rate of 6.65% or more would reach the breakeven point at which refinancing may be profitable. Only a small percentage of borrowers would profit from refinancing anytime soon, as over 80% of homeowners already have mortgage rates below 6%.
Those who purchased homes within the last two to three years, when interest rates were between 7% and 8%, would stand to gain the most. They could be more than 1% “in the money,” making refinancing appealing, even with a slight decline in market rates. However, refinancing savings would be more important because these borrowers typically have big loan amounts and want to remain in their houses for at least five more years.
In the meantime, homeowners who are “out of the money” or trapped into low 3% to 4% mortgages “are pretty irrelevant” to any slight rate reductions.
Additionally, homeowners should keep in mind that it’s not just about stated average mortgage rates but also about the rate they can obtain. According to Krimmel, credit, down payments, and shopping around are crucial and can have a greater impact than changes in Fed policy.
The post Will Refinancing Help U.S. Homeowner Affordability? first appeared on The MortgagePoint.
