Last year’s homebuyers watch for fleeting chance to refinance
A few weeks ago, Sean Dycus thought he spied the window to snatch a lower mortgage rate than the 8% he got saddled with in December when he bought an investment home in South Carolina for $450,000.
“I got an offer that would lower my rate by almost a percent and a half,” Dycus, who works with Mainstreet Properties, told Yahoo Finance. “I thought about it, sat down and did the numbers. Then rates went up again.”
That’s the fast-changing rate environment last year’s homebuyers face as they hope to shed the much higher-than-expected mortgage rate they were forced to swallow in 2022 in order to close on a home.
“I knew rates were high when I bought, but I also knew that I wasn’t going to get a perfect deal again,” Dycus said, noting he got a 20% price discount on the property. “I thought, I’ll just suck it up and refi when it’s time to refi.”
The latest chance may have passed Dycus by. The average rate on the 30-year fixed mortgage increased to 6.65% this week, according to Freddie Mac, climbing over a half-point in the last four weeks as recent data showed inflation was still a threat.
The rate, which began a downward trajectory in January, was a whisker away from dropping below 6% at the start of February, perking up refinance activity then. For instance, the volume of refinance applications increased 15% for the week ending Jan. 20, according to the Mortgage Bankers Association survey.
“There may have been some buyers who grabbed rates at 6.75% or more last fall who might have had a chance at a 6.25% rate,” Keith Gumbinger, vice president of HSH.com, told Yahoo Finance.
Now with rates closer to 7% than 6%, only 161,000 high-quality candidates could shave at least three-quarters of a point off their mortgage if they refinanced, according to figures mortgage technology and data provider Black Knight shared with Yahoo Finance. Black Knight defines high quality as 30-year mortgage holders with a maximum 80% loan-to-value ratio and a credit score of 720 or higher.
The “general rule of thumb” when it comes to refinancing, according to real estate agent Monte Miner, is you need at least to save 1 percentage point to make refinancing financially worthwhile. This calculus changes somewhat depending on the loan amount — higher amounts could benefit from a three-quarter or even half-point point reduction in rate.
“If you can get into a home you can afford, and can at least save a full percentage point, that can save you money. Let’s say you save 1% on a $400,000 loan, that’s $4,000 less a year,” Miner, who’s with Ironwood Fine Properties, told Yahoo Finance. “If you have a new loan with a rate in the 7s or above 7%, then it's going to be worth refinancing. I think there might be some opportunity for that in the future."
That describes many buyers from last year. More than 225,000 home loans originated in 2022 have rates at or above 7%, of which 209,000 are high-quality candidates, according to Black Knight data.
“A growing pocket of opportunity exists to refinance recently-originated loans, should 30-year rates drop into the mid- to low-5% range,” Andy Walden, vice president of enterprise research and strategy at Black Knight, told Yahoo Finance.
When rates fall that low is anyone’s best guess. Though “forecasting is far more art than science,” Gumbinger anticipates that rates are likely to tilt even higher before sliding enough to attract more refi business.
“At present, and while there is a chance that rates could retreat to recent bottom levels or perhaps a little below at some point, much depends on what happens with prices, with the Fed, and ultimately whether or not the economy gets to a tipping point and starts to head into recession,” Gumbinger told Yahoo Finance.
“Forecasts are all over the board in that regard. Personally, I think there's at least a non-negligible chance that the Fed lifts rates several more times and the economy hits a tipping point late 2023/early 2024, after which inflation and interest rates would, of course, head lower.”
And it’s not just mortgage rates new homeowners must consider. It’s also the cost to refinance. While those expenses, which can range between $5,000 and $7,000 on a $400,000 loan, can be wrapped into the total cost of the new mortgage, refinancing isn’t free.
Still, the math may make sense if rates fall enough.
“For me to get out of this current loan, it would cost around $13,000. If I can get my rate down to 6%, that alone can save me like $2,000 a month. If you multiply that by 12 months, I’ll get that return on that investment, it’ll be worth it,” Dycus said. “If rates hit that tomorrow, I’d do it tomorrow.”
Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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