Falling interest rates are expected to bring additional declines in mortgage rates, but most homeowners are unlikely to benefit significantly from a mortgage refinance, according to a recent analysis.
Realtor.com senior economist Jake Krimmel, in an interview with Fox News, explained that the key to determining whether refinancing makes sense depends on reaching a financial break-even point. He said homeowners must calculate whether the savings from a lower monthly payment will eventually offset the costs associated with refinancing.
Krimmel emphasized that borrowers need to consider several important factors, including the remaining balance on their mortgage, the number of years left on the loan, and how long they plan to stay in the home.
A common method for evaluating a refinance is to divide the total closing costs by the expected monthly savings. This calculation shows how many months it will take to recover the upfront expenses. If a homeowner plans to sell or move before reaching that break-even point, refinancing is unlikely to provide real financial benefit.
Although mortgage rates are projected to hover in the low 6% range this year, experts say the drop is not large enough to create meaningful savings for most borrowers. The average rate has eased slightly from last year’s 6.6%, but the change remains modest.
Any reduction in monthly payments must accumulate over many years to outweigh the costs of taking out a new loan. Because refinancing requires paying closing costs again, potential gains are limited under current conditions.
Realtor.com advises that refinancing generally becomes worthwhile only when a homeowner can secure a rate at least 0.5 to 1 percentage point lower than their existing mortgage.
The problem is that most homeowners already hold loans with rates well below today’s levels. More than 80% of borrowers nationwide have mortgages under 6%, making it difficult for them to achieve enough savings to justify refinancing.
Realistic benefits are largely limited to homeowners whose current rates are 6.65% or higher. Borrowers who purchased homes during the past two to three years, when rates climbed into the 7% to 8% range, stand to gain the most if rates fall further. Even for these homeowners, refinancing typically makes sense only if they have a sizable loan balance and plan to remain in the property for at least five years.
Experts also note that the national average mortgage rate is only part of the equation. Individual factors such as credit score, down payment size, and careful comparison shopping among lenders can have a greater impact on the final rate a borrower receives than small movements in overall market rates.
BY HOONSIK WOO [woo.hoonsik@koreadaily.com]
