Missed Out on $6.2 Billion in Savings Last Week? Here’s How Investors Should Approach Rates Moving Forward

Anyone involved in real estate has likely engaged in the constant speculation around the Federal Reserve’s decisions on the federal funds rate. It’s easy to understand why, given that mortgage rates are closely linked to Fed policies. Yet, despite the anticipation of rate cuts, recent data shows refinancing activity—which currently makes up most mortgage applications in the U.S.—fell by 26.8% for the week ending October 11. This should give pause to those expecting a significant impact from rate changes.

The Surprising Drop in Refinancing Amid Rate Cuts

Despite mortgage rates being influenced by the Fed’s actions, this latest drop in refinancing raises questions about the mortgage market’s actual trajectory.

Mortgage Rates Drop, but Lenders Are Hesitant

Mortgage rates fell to an average of 6.08% in late September, following the Fed’s half-point rate cut announced on September 18. Even before the announcement, rates were already trending down, and the Fed’s move brought them from 6.20% to just above 6%, a number many homeowners had been hoping for. As a result, refinancing surged by 20% week-over-week in late September.

However, by October 3, rates climbed back up to 6.12%, and by October 10, they reached 6.32%. It was as if the Fed’s announcement had little long-term effect.

Zillow data showed that even small rate changes caused around 275,000 borrowers to miss out on potential refinance savings, amounting to a collective five-year loss of more than $6 billion.

Refinancing Opportunities: What You Should Know

Conventional wisdom suggests that refinancing makes sense when mortgage rates drop by 1%. However, Bankrate points out that even a reduction of 0.5% to 0.75% could be worthwhile. With rates having been over 7% as recently as May, those who took out loans at higher rates could still benefit from refinancing now.

However, recent borrowers may find it more prudent to wait for further drops in rates, as the savings might not justify the costs of refinancing just yet.

Understanding Why Mortgage Rates Are Rising Again

It’s important to remember that the Fed’s key rate isn’t the only factor influencing mortgage rates. While September’s reductions may have been partly in anticipation of rate cuts, lenders also consider various factors like the labor market, 10-year Treasury yields, inflation, and other macroeconomic indicators.

The strong labor market and high Treasury yields are just two reasons lenders remain cautious. Additionally, external factors like geopolitical tensions, including the Gaza conflict, can influence domestic financial conditions, complicating predictions about rate changes.

Freddie Mac’s chief economist, Sam Khater, noted that escalating geopolitical tensions and a rebound in short-term rates contributed to the rise in mortgage rates, indicating that the market may have overestimated the impact of rate cuts.

Where Are Mortgage Rates Headed Next?

Many investors aiming to refinance are now wondering if it’s worth waiting for further rate declines or if they should act now before conditions worsen.

Fortunately, most economists expect mortgage rates to continue trending downward through the rest of the year and into 2025. Freddie Mac predicts that while there may be some short-term volatility, rates should remain above 6% by year-end.

Keith Gumbinger, VP at HSH.com, shares a similar outlook, suggesting that rates between 6% and 6.4% are likely for the near future. Earlier forecasts of rates dropping into the 5% range now seem unlikely. However, for anyone with a current mortgage around 7%, locking in a rate just above 6% could still be a favorable move in the coming months.

If rates stay in the 6.3% to 6.4% range, refinancing may no longer make sense for many borrowers. It’s essential to remember that refinancing involves costs like appraisals and closing fees, similar to applying for a new mortgage.

As Matt Vernon, head of retail lending at Bank of America, advises, “Just because you can secure a lower rate doesn’t necessarily mean you should refinance right away.” A lower monthly mortgage payment might come with the trade-off of extending your loan term and paying more in interest over time.

This advice holds true for investors, as well. Those planning to sell within the next five years may want to avoid refinancing, but if the property is a long-term hold, refinancing could be beneficial.

For investors considering a cash-out refinance, it’s important to note that these loans typically come with higher interest rates. Still, the immediate cash influx could be useful for paying off debts or purchasing another property, in which case calculating the return on that new investment is more critical than the interest rate itself.

Final Thoughts

While Fed announcements play a role, mortgage rate fluctuations are driven by a variety of factors. Investors planning to refinance this year or next may still benefit from declining rates, though dramatic reductions are unlikely. The best-case scenario for the near future seems to be rates hovering slightly above 6%, which could still offer refinancing opportunities for those with higher-rate mortgages.

In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“