Personal Finance
When to refinance your mortgage as the Federal Reserve cuts rates
Andresr | E+ | Getty Images
The Federal Reserve is poised to make its first interest rate cut in years on Wednesday. But homeowners shouldn’t bet on the move as an opportunity to immediately refinance their mortgage.
That’s because “a lot of these rate cuts are already priced in,” Chen Zhao, the economic research lead at Redfin, an online real estate brokerage firm, recently told CNBC.
While mortgage rates are partly influenced by the Fed’s policy, they are also tied to Treasury yields and the economy. Home loan rates have already started to come down in recent weeks, slightly induced in part by favorable economic data and indications the Fed could cut rates.
As of Thursday, Sept. 12, the average 30-year fixed rate mortgage in the U.S. was 6.20%, according to Freddie Mac data via the Fed. That’s down from this year’s peak of 7.22% on May 2.
More from Personal Finance:
What homeowners and buyers need to know as first rate cut is on the horizon
Don’t expect ‘immediate relief’ from the Federal Reserve’s first rate cut
Mortgage rates are falling, improving home buying conditions
It can be very difficult to perfectly time a mortgage refinance by looking at mortgage rate activity alone, said Jeff Ostrowski, a housing expert at Bankrate.com.
“It’s almost impossible to figure out what mortgage rates are going to do from week to week or month to month,” Ostrowski said.
Yet there are ways homeowners can determine when a refinance makes the most sense to them, experts say, especially if more rate cuts are slated before the end of the year.
Here’s how to know when it’s time to refinance your mortgage, according to experts.
‘This is going to be a much smaller wave’
Refinance activity increased to 46.7% of total applications during the week ending Sept. 6, up from 46.4% the week before, according to the Mortgage Bankers Association.
While there has been an increase in refinances as mortgage rates come down, “compared to the massive refinance boom” in 2020 and 2021, “this is going to be a much smaller wave of refinances,” said Ostrowski.
Most homeowners have a mortgage rate below 5%, said Channel.
A refinance will mostly benefit a “small number of people” who bought homes “when rates were at 8%,” said Ostrowski.
Whether it’s smart for homeowners to refinance their mortgage or not will depend on factors such as their existing borrowing and repayment timeline, experts say.
How to know when it’s time to refinance
If you are thinking about refinancing, look carefully at what’s going on with rates in the market, reach out to lenders and see if doing so now or in the near future makes the most sense for you, Channel said.
“The only person who can decide whether or not refinancing is going to be worth it is you, based on what’s going on in your life,” he said.
Here are three criteria that can help you determine if a refinance makes the most sense to you:
1. You can cut your rate by 50 basis points or more
To be know when it makes sense to refinance, homeowners need to see a notable drop in mortgage rates in order to benefit, experts say. The prevailing rate should be at least 50 basis points below your current rate, Zhao said.
But that’s not a “hard and fast rule,” Channel said.
Some experts set a higher bar: It “makes sense” to consider a refinance if rates have fallen one to two points since you took out the mortgage, Ostrowski said.
Even if your existing mortgage has a high rate, you might want to consider waiting until the central bank is further along in its cuts. The expectation is that rates are to steadily decline throughout the rest of 2024 and into 2025, according to Zhao.
2. You can afford refinance costs
There are two ways to pay for a refinance: with cash up front, or by rolling the expense into your new loan, boosting your monthly mortgage payment.
There’s no such thing as a free lunch when it comes to refinancing a loan, Melissa Cohn, regional vice president of William Raveis Mortgage in New York, told CNBC last month.
Generally, a refinance is going to cost anywhere between 2% and 6% of the loan amount that you are refinancing, said Channel.
For example: If your current loan amount is $250,000 and you’re refinancing the total amount, expect to pay anywhere between 2% to 6% of $250,000, or roughly $5,000 to $15,000.
If you plan to refinance, make sure you can afford the associated costs, like closing costs, an appraisal and title insurance. The total cost will depend on your area.
3. Your savings will outweigh the costs
You can also look into your “break-even point,” or the moment your savings eclipse the cost of the refinance, said Channel.
Here’s an example on doing that math: If you decide to refinance your mortgage and it costs $6,000 and you’re saving $200 a month, divide $6,000 by $200. The result is the number of months that you have before your refinance has “paid for itself.”
A trader wears a Trump hat as he works on the floor of the New York Stock Exchange during the opening bell on Nov. 6, 2024.
Timothy A. Clary | Afp | Getty Images
On Nov. 5, the presidential election handed a decisive victory for President-elect Donald Trump. In the days that followed, the markets soared.
A “Trump trade” led to new index highs for the S&P 500 and Dow Jones Industrial Average, lifted with the help of certain sectors expected to do well under the president-elect’s second term.
As of Monday, the postelection market fervor had started to subside to preelection levels.
Yet, some experts say they are seeing a renewal of so-called animal spirits.
“Animal spirits” is a term first coined by economist John Maynard Keynes and refers to the tendency for human emotion to drive investment gains and losses.
Some experts say animal spirits are a sign of consumer confidence. However, the phenomenon can also be trouble for investors if they take on “excessive risk,” said Brad Klontz, a psychologist and certified financial planner.
“It’s essentially why dead investors outperform living investors, because dead investors are not impacted by their animal spirits,” Klontz said.
Research has shown dead investors’ portfolios tend to outperform, since they are left untouched because they are less likely to be influenced by emotional decisions, such as panic selling or buying.
Investors may be excited or fearful
The recent market runup was not prompted by individual investors chasing the market to a meaningful extent, according to Scott Wren, senior global market strategist at Wells Fargo. Individuals, who were split in their election choices, are also divided in their investment outlook, he said.
“Depending on who your candidate was, you may be excited about the future or fearing the future,” Wren said.
Instead, it has been professional traders and money managers — who couldn’t sit on cash when the S&P 500 index was setting new records every two or three days — who have helped drive the markets higher, he said.
There is also big-picture excitement going into 2025, according to Wren, with expectations for lower taxes, less regulation and reasonable levels of inflation. However, the U.S. economy might have a couple of quarters of slower growth in 2025, he said.
“We’re not going to have a recession,” Wren said. “We think that’s very unlikely.”
‘Nobody is immune’ to investing missteps
Ideally, investors ought to sell stocks when they are priced high and buy when they are low.
But research consistently finds the opposite tends to happen.
Humans are wired to take on a herd mentality and follow the crowd, which guides our decision-making on everything from who we vote for to how we invest, according to Klontz.
“The first thing is to just recognize that nobody is immune from this,” Klontz said.
Now is the perfect time for investors to make sure they have an asset allocation that is appropriate to their personal risk tolerance and financial goals, he said.
“It’s harder to do when the market’s crashed,” Klontz said.
Additionally, it is important to keep in mind that financial advisors, like all humans, are also susceptible to biases. When seeking financial advice, investors should ask questions such as “What would you do as my advisor if the market went down 50%?” Klontz said.
Good advisors should have systems in place to keep them from making big mistakes, Klontz said. They may have an investment committee or a predetermined approach for how they will act.
Importantly, investors should also be asking themselves the same question, Klontz said. For example, if the market drops 40%, are you OK with your portfolio dropping from $100,000 to $60,000?
“If the answer is no, then you probably shouldn’t be all in stocks,” Klontz said.
However, if you are young enough, a big market drop could be an important opportunity to dollar cost average — or invest a fixed amount of money on a regular basis — and position your money for larger gains when it recovers.
“Most people have a real tough time doing that, which is why advisors can help,” provided they are familiar with behavioral tendencies, Klontz said.
If you still haven’t booked your holiday travel plans, take note: Prices tend to rise the closer you get to the days you’re looking to travel.
To afford holiday trips, about 50% of respondents are cutting back on other expenses while 49% are picking up discounts and deals, according to the 2024 Holiday Travel Outlook by Hopper, a travel site.
Some last-minute holiday travelers are leaning into so-called “Travel Tuesday” — or the Tuesday after Cyber Monday and Black Friday — which falls on Dec. 3 this year.
Search interest for Travel Tuesday rose more than 500% from 2021 to 2023, according to a recent report by McKinsey and Company.
More from Personal Finance:
Black Friday deals aren’t always the best
28% of credit card users are still paying off last year’s holiday tab
Here’s who can ‘easily afford’ holiday costs
There’s a reason why shoppers are searching for the term.
Last year, 83% more deals were offered on Travel Tuesday versus Cyber Monday and 92% more than Black Friday, according to Hopper data.
Yet, there may be some limitations on the deals available, experts say.
“The challenge for a lot of people is, ‘Do I wait?'” said Sally French, a travel expert at NerdWallet.
For travelers who are set on specific days and places to visit, the answer might be “no.”
“While airlines and online travel agencies are going to offer flight deals on Travel Tuesday, there is no reason to wait,” said Phil Dengler, co-founder of The Vacationer, a travel platform.
How much you benefit from potential discounts on Travel Tuesday will depend on your flexibility, experts say.
“If you have zero flexibility,” said Hayley Berg, economist at Hopper, then “if you see a good deal before Travel Deal Tuesday, feel free to book it.”
How Travel Tuesday works
People wait in line for security checkpoints ahead of the Thanksgiving holiday at O’Hare International Airport in Chicago, Illinois, U.S. November 22, 2023.
Vincent Alban | Reuters
Similar to Black Friday and Cyber Monday sales, Travel Tuesday deals sometimes begin to roll out before the day itself, said Dengler. They might even stretch into the day after.
Nonetheless, you will typically need to book the flight, hotel stay or cruise trip by the end of the day in order to reap the benefits, he said.
As you shop, make sure to read the fine print in case discounts only apply for certain routes and days, Dengler explained.
Retailers often have a limited stock for Black Friday and Cyber Monday doorbusters. With Travel Tuesday, there may be a limited number of airline seats or hotel rooms, NerdWallet’s French said.
“They’re not going to fly two planes on the same route at the same time,” she said.
‘Be ready’ to book
Travel Tuesday might be better suited for deciding when and where you’ll go for an upcoming vacation in 2025, versus a very specific itinerary home over the holidays.
If you are not flexible on the days and destinations you plan to travel to and you find a flight available at a price you’re comfortable with, “book that trip right now,” French said.
“If you wait until Travel Tuesday, then that deal could be gone,” she said. “You don’t want to wait for Travel Tuesday for it to be sold out.”
In some cases, it doesn’t hurt to book ahead and keep browsing for potential price drops, experts say.
You typically have 24 hours from booking to cancel for a full refund as long, as it’s seven days before a flight’s scheduled departure time, Dengler said. Plus, some airlines don’t have change fees for non-basic economy fares, he said.
If those terms are in your favor, “if you see a better deal on Travel Tuesday, simply cancel your current bookings and book the Travel Tuesday offer,” Dengler said.
On the flip side, if you’re less tied to specific dates and places, but have a general sense of where and when you want to travel, then holding off until discount days may be worthwhile.
“We tend to see the deals do get better and better the closer we are to actual Black Friday or actual Travel Tuesday,” French said.
The biggest takeaway for travelers is to start thinking about what you might want to book, Berg said.
“I really encourage travelers to do that exploration now so that on Travel Deal Tuesday, they can be ready to actually book,” she said.
XPeng sees ‘knockout’ phase in China’s auto market in the next few years
As market experts talk of ‘animal spirits,’ here’s how to invest now
Stocks making the biggest moves premarket: WMT, LOW, SMCI, BNTX
Are American progressives making themselves sad?
U.S. Beneficial Ownership Information Registry Now Accepting Reports
New 2023 K-1 instructions stir the CAMT pot for partnerships and corporations
-
Technology1 week agoAI Use Cases: Retail, Finance & Healthcare Solutions
-
Blog Post1 week agoThe Essential Practice of Bank and Credit Card Statement Reconciliation
-
Accounting3 days agoHow to Create an Effective Invoice Process for Small Businesses
-
Technology1 week agoThe Rise of Superapps: How AI is Powering the Next Generation of Mobile Apps
-
Personal Finance4 days agoOlder voters prioritized personal economic issues on Election Day: AARP
-
Economics5 days agoClimate change and the next administration
-
Economics5 days agoWholesale prices rose 0.2% in October, in line with expectations
-
Economics5 days agoSenate Republicans flex their independence