$6.2 Billion in Potential Refinancing Savings Vanished as Mortgage Rates Climbed Back to 6.6%
The recent increase in mortgage rates has significantly impacted the refinancing landscape for homeowners. As mortgage rates climbed back to 6.6%, approximately 275,000 fewer households are now in a position to benefit from refinancing compared to the previous week. This shift has resulted in a collective potential loss of around $6.2 billion in refinancing savings over the next five years.
Despite the rise in rates, borrowers who purchased homes in 2023 at a mortgage rate of 7.6% or higher could still benefit from refinancing at the current rate of 6.6%. These homeowners could save an average of $391 per month, totaling $23,460 over the next five years. This presents a significant opportunity for those who bought during the peak rate period of 2023.
Analysis of Refinancing Potential
A Zillow analysis of 2023 Home Mortgage Disclosure Act (HMDA) data reveals that more than 434,000 home buyers in 2023 would have benefited from refinancing at a 6.1% mortgage rate. However, with rates now at 6.6%, less than 160,000 home buyers would find refinancing advantageous. This means about 275,000 borrowers missed out on potential savings, resulting in a total five-year loss of more than $6 billion for these homeowners.
Fluctuations in mortgage rates are causing potential monthly payments to shift quickly for home buyers. This volatility also affects households who purchased homes previously, altering the calculus on whether refinancing could help lower their monthly payments. More than half of borrowers who bought in 2023 paid an interest rate higher than today’s average rate of 6.6%.
Considerations for Homeowners
It is essential for borrowers to consider the costs associated with refinancing, including origination fees and closing costs, which can offset potential savings. Knowing the breakeven timeline is also critical. The specific rate improvement for which it makes sense for a homeowner to refinance depends on the borrower’s situation. For example, if a homeowner intends to sell in five years, it might not make sense to refinance and only save $100 per month if the upfront origination cost is $6,000. If the monthly savings are greater, or the borrower intends to hold the new loan longer, that calculus would change.
The lending industry’s rule of thumb is that refinancing may be worth considering if the mortgage rate drops by at least one percentage point. Using this threshold as a guideline, about one in ten home buyers from 2023 may find refinancing advantageous. How much a household could save depends on how much their mortgage rate improved and their loan size.
Regional Variations in Savings
For a hypothetical U.S. homebuyer who bought in October 2023, around peak interest rates, the typical mortgage payment was $1,989, assuming a 20% down payment when purchasing a typical U.S. home, as measured by the Zillow Home Value Index (ZHVI). Should these households secure a rate of 6.6%, they would save $190 on their monthly payment, down from savings of $282 per month had they refinanced a week ago at 6.1%.
In ultra-expensive San Jose, where the typical monthly payment for a home bought in October 2023 was $8,229, the estimated savings from refinancing would be significant – $785 per month. For a lower-priced metro like Pittsburgh, where the typical mortgage payment was $1,188 last October, estimated savings from refinancing is a more modest $113 per month.
Future Considerations for Recent Home Buyers
As the recent rise in mortgage rates shows, there is no guarantee that mortgage rates will continue to fall even as the Fed cuts its key rate further. Expectations for additional Fed rate cuts are already priced into today’s mortgage rates. If a 2023 homebuyer is eligible for a refinance now, waiting could be risky. If the Fed under-delivers as new data comes in, mortgage rates could rise.
Recent home buyers should keep an eye on mortgage rate changes and take advantage when refinancing benefits their financial situation. By taking proactive steps to monitor and act on market trends, homeowners can make informed decisions to potentially save on their mortgage costs in the long run.
Homebuyers exploring refinancing can use Zillow’s refinance calculator to determine if it’s the right time for them. By entering details about their current and future loans and rates, borrowers can evaluate the benefits of refinancing to achieve their financial goals, such as reducing monthly payments, lowering interest rates, adjusting loan terms, removing mortgage insurance, and more.
