Mortgage rates have fallen to their lowest level in 11 months. Already, some homeowners are refinancing. Others are waiting in hopes that rates will drop more.
The average rate on the 30-year fixed-rate mortgage fell 16 basis points to 6.46% in the week ending Sept. 11, according to rates provided to SS by Zillow. A basis point is one one-hundredth of a percentage point. It was the lowest average rate since mid-October 2024.
More people are refinancing
Almost half of mortgage applications last week were for refinances, according to the Mortgage Bankers Association. That’s a modest increase from a week before, and 34% more than a year ago.
And according to mortgage market platform Optimal Blue, there was a surge in refinances in August, when rates were higher than they are now. “Borrowers are responding quickly to rate improvements, driving the strongest month for rate-and-term refinances we’ve seen this year,” said Mike Vough, head of corporate strategy at Optimal Blue, in a news release.
In a rate-and-term refinance, you replace your old mortgage with a lower-rate mortgage for the same amount. The goal is to reduce the monthly payments.
Carolyn Morganbesser, assistant vice president of mortgage originations for Affinity Federal Credit Union in New Jersey, says she urges caution before refinancing. “Do we get calls about refinances? Sure, we do all the time,” she says. “Sometimes it makes sense, sometimes it does not.”
The decision comes down to the break-even period.
A shorter break-even period is better
When you refinance, you pay various fees. These closing costs usually add up to thousands of dollars. The break-even period is the time it takes for the monthly savings to add up to more than the closing costs.
You calculate the break-even period by dividing the costs by the monthly savings. For example, if you pay $5,000 in fees to save $100 a month on the mortgage, it will take 50 months to break even.
Four-plus years is a long time to wait before coming out ahead. If it’s your forever home, maybe it’s worth it. But generally, Morganbesser is dubious about break-even periods longer than two years or so. When they’re that long, she says she advises waiting to see if rates fall lower.
A confounding economy
Keep in mind that lower rates are not guaranteed. The economic outlook is unclear, so the forecast is muddy.
Mortgage rates have fallen in the last couple of weeks because job creation has been weaker than expected. The unemployment rate crept upward from 4.1% in June to 4.2% in July to 4.3% in August. Meanwhile, job growth numbers have been revised downward.
The struggles in the job market are leading investors to guess that the Federal Reserve will cut the overnight lending rate when the central bank meets Sept. 16 and 17. The mortgage market tends to move in advance of Fed rate actions, and that’s what happened this time: mortgage rates fell.
Here’s what complicates the picture: inflation isn’t going away. The core consumer price index in August was 3.1%, which is higher than the Fed’s 2% goal. The Fed controls inflation by raising the overnight rate. So if the Fed cuts that rate Sept. 17, it will be addressing unemployment but not inflation. And the prospect of unchecked inflation could send mortgage rates higher.