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It's Time to Refinance Your Mortgage, Thanks to the Fed

Doug Whiteman
It's Time to Refinance Your Mortgage, Thanks to the Fed

If you're a homeowner and haven't refinanced your mortgage yet, you have officially run out of excuses. Today's historically low mortgage rates across the U.S., including in your area, just got a big shove from the Federal Reserve.

In a surprise move the Fed has taken an ax to the interest rate it controls, chopping it down by one-half of one percentage point. It's the Fed's largest rate reduction since 2008, and double the size of the usual rate cut.

The move by America's central bank will ripple through other borrowing costs and will lower the rates on credit cards, student loans, home equity lines of credit — and mortgages, too.

The impact on mortgage refinance rates

Mortgage rates were already near or at all-time lows. Mortgage News Daily reports that its survey showed 30-year fixed-rate mortgages dropped on Monday to an unheard-of 3.13%, on average.

Rates that are so deep in the cellar can mean substantial savings for homeowners who refinance. Let's say you took out a 30-year, $200,000 mortgage a year ago at a fixed 4.36%, which was about the average at that time. Your current monthly payment would be close to $997.

Refinancing at 3.13% would give you a monthly payment of just $857, for a savings of $140 a month, or $1,680 per year.

But depending on the size of your loan, you might do even better — because data firm Black Knight has estimated that 11.1 million U.S. homeowners could save an average $268 per month by refinancing.

And now, mortgage rates are likely to drop even lower and provide even more refi opportunities, because the Fed's supersized rate cut has triggered an almost unbelievable slide in Treasury bond rates. Mortgage rates track the rate on 10-year Treasury notes, which has taken a nosedive below 1% for the first time in history.

If you're a homeowner or homebuyer and you see a great mortgage interest rate, lock that rate so you won't miss out.

Why the Fed did what it did

Thomas Barrat / Shutterstock
The Federal Reserve building in Washington, D.C.

Instead of waiting for their next formal meeting, in mid-March, Fed policymakers took emergency action to slash their benchmark interest rate as an economic insurance policy against the coronavirus.

"The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity," the Fed said in a statement on Tuesday.

The worsening outbreak — which has spread to at least 80 countries, including the U.S. — has set off fears of a global recession because travel is being cut back, workers are being quarantined, and factories, theme parks and other places of business are shutting down.

The U.S. has seen its first deaths, raising the fear factor. The stock market has been experiencing some of its worst trading days in history, and the Dow Jones Industrial Average lost almost another 800 points after the Fed took its emergency action.

The Fed hopes that by slashing interest rates, it can reassure the financial markets that it's doing all it can to counter the threat, and that it can keep the economy's record-long expansion going by making it easier for businesses and consumers to borrow.

By helping to provide more super low mortgage rates, the Fed is giving you even more reason to refinance your mortgage — so you can save some money that you might then turn around and spend, to help keep the economy on its feet.