“Are you a gambler?” It’s a question mortgage broker Aaron Gordon asks lots of his clients — and not just because he’s branch manager of a Guild Mortgage outside of Las Vegas, Nevada.
Mortgage refinancing is essentially a gamble, he said. Refinance when you know rates have ticked down, or bet that rates will fall further in the near future — which do you pick?
That dilemma is weighing on homeowners across the U.S., particularly those who took out a mortgage in 2023 or 2024. Two years ago, the average 30-year fixed rate mortgage was over 7.75%. This week it’s down to 6.26%.
The Federal Reserve cut its key interest rate by 25 basis points earlier this week. And Fed Chair Jerome Powell hinted at two more rate cuts this year.
That news stirred up serious interest in refinancing. But to be clear, the Fed rate doesn’t directly correlate to mortgage rates — the 10-year Treasury rate does.
“That’s a market-driven rate that is reflecting expectations about economic growth and the management of the economy over the next 10 years,” said Ben Keys, an assistant professor at University of Pennsylvania’s Wharton School.
The short-term Fed rate sometimes mirrors the long-term bond market, but not always. So if you’re a homeowner deciding when to refinance, the truth is the Fed rate is “not the right piece of information” to focus on, Keys said. The 10-year T-note rate is — and it actually ticked up after the Fed news, in response to OK-ish jobs numbers.
Regardless, mortgage rates came down in anticipation of the Fed cut. But that still doesn’t mean every homeowner should jump to refinance. Mariana Kotzeva, owner of Mutual Financial Corporation, a mortgage brokerage in Des Plaines, Illinois, counsels her clients to consider their personal financial situation alongside the macro one.
In some cases, waiting it out for further rate drops might not make the most sense. “Your credit might go lower. You might lose your job — God forbid,” Kotzeva said. “It’s better to take $300 in savings now when it’s available, than hoping that maybe you’ll save $400, $350 in six months or a year.” On the flip side, if your credit score or income has fallen, it may be better to hold onto the mortgage you have.
The cost of a new loan is also worth considering, Kotzeva said. If a homeowner is thinking of selling soon, refinancing may not be worth the hassle or cost. There are also plenty of homeowners sitting on mortgages with sub-3% rates who have no reason to refinance.
All that said, lots of homeowners would benefit from refinancing while rates are cooling. This is particularly true of homeowners who bought in the past few years, when rates hit a 23-year high.
“There’s always opportunities to get a lower rate, but there’s no opportunity to get the price that was available two years ago,” said Kotzeva. That’s the advice she gave buyers a couple years ago. Now, lower rates are here — and so are higher home prices.
Lately, Aaron Gordon in Las Vegas has been reminding clients about September 2024. The Fed cut rates September 18, and average mortgage rates fell to 6.08%. Days later, a sour jobs report sent the bond market in the opposite direction. Mortgage rates followed and by January, they had climbed above 7%.
Moral of the story? The present rates are certain. No one can guarantee what might happen next week or next month. Gordon said he’s telling clients, don’t take the gamble. If you know refinancing will save a significant amount, now is the time to act.
He also said September 2024 is a reminder to shop around for knowledgeable loan professionals, rather than picking the absolute lowest rate and fees.
“How many true mortgage professionals were reaching out to clients in those first two weeks? Probably not, not as many as you expect, right?” he said. Without expert advice, many borrowers missed the window.
“Those who would benefit the most from refinancing are often the ones who don’t”
Research has shown that homeowners who stand to gain the most from a new mortgage — particularly cost-burdened, lower-income families — are less likely to refinance, said Ben Keys at Wharton. That could be a result of less knowledge or concern that the process of originating a new mortgage might be costly.
His advice? Discuss your options with a trusted mortgage broker in your area. Remember, the housing market truly is a regional beast.
And, Keys said, talk with other homeowners in your social circle who might be unaware that mortgage rates are coming down. You could help them save a lot of money.
Research backs this up: A 2015 study, “Teachers Teaching Teachers”, showed teachers are 26% more likely to refinance if another teacher at their school, with the same break period, also refinanced. They often even used the same lender.