Macroeconomic Landscape
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Every week, we discuss the latest update on mortgage rates since so many of our clients have high-interest mortgage rates, and home ownership has become much less affordable over the past few years. The graph below shows the latest update as of 8/13/24, where the current 15-year fixed mortgage rate is 5.63%, and the 30-year fixed mortgage rate is 6.47%. A portion of our readers may have mortgage rates that are much lower than these, but those who bought their homes over the past two years are likely sitting higher than the current rates. The good news, as shown in the graph, is that rates are coming down and will likely continue to come down.
Why now?
Well, the macroeconomic landscape is changing. Where we were sitting at, high inflation rates, employment, wage growth, and a cooling of demand are all driving factors of this change. The Federal Reserve increased the short-term borrowing rate, hoping to drive each of these factors back to normalization. We’re approaching, or arguably have reached, this normalization, so mortgage rates are starting to come down. Also, the Feds are anticipating a reduction of the short-term rate (which is what banks use to borrow money from each other, not consumers), which will, over time, decrease the borrowing cost for consumers for almost all goods and services.
When is a good time to refinance?
Now, on to the practical portion of the post. With back-to-school season upon us, does everyone have their calculators ready?
Let’s use the variables below as our starting point and add ongoing complexity as we progress.
Mortgage value $450,000
Current Interest rate 7.5%
Term 30 yr fixed
Current monthly payment of $3146.47 (Excluding taxes, insurance, PMI, and other monthly fees)
No downpayment
Now, there is an opportunity for this homeowner to get a mortgage at 5.5%. The investor must calculate their break-even period to determine if this transaction makes sense. This is calculated by:
Current Monthly Payment – Potential future monthly payment
Closing Costs
The value above will show the number of months until the closing costs are recovered. Closing costs are a significant factor to consider. These can include an origination fee, appraisal fee, title insurance fee, and possibly a credit report fee. Typically, these costs are between 2-6% of the loan amount and can vary depending on the loan originator and homeowner’s credit history. Let’s look at this mathematically:
At 5.5%, the new monthly payment would be $2555.05. let’s look at a few scenarios with different closing costs:
The two significant variables in this equation are the closing costs and the future payments. If both are low, this results in a short “break even” and a better outcome for the homeowner. Remember, the market may have headlines that it’s a great time to refinance but do the math to verify. If the “break even” is three years or less, it may be a good time to refinance.
Refinance with a FINE tooth comb
If you’ve read any of my posts, you know I enjoy a good play on words. Take additional scrutiny when considering to refinance. It may be a great time, or the math may not work out. Wherever you are on your journey, keep in mind our team is always available to walk with you.
If you don’t feel comfortable doing these calculations on your own or would like advice on how to get through baby steps 1-4 or invest and grow your wealth, contact one of our team members to discuss. The Whitaker-Myers Wealth Managers team is just a few clicks away.
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