Considering a mortgage refi? Lower rates are just one factor when refinancing a home loan

LOS ANGELES (AP) — Mortgage rates haven’t been this attractive in more than a year, good news for homeowners eager to refinance.

Many homeowners have already jumped at the opportunity to lower their monthly payment, spurring a surge in mortgage refinancing applications.

And that was before the average rate on a 30-year mortgage fell this week to 6.47%, according to mortgage buyer Freddie Mac. As recently as May, the rate averaged 7.22%. It’s now at a 14-month low.

The rush to refinance makes sense, as even a slight drop in mortgage rates can translate into significant savings over the long run. For a home with the median U.S. listing price of $440,000, a buyer who makes a 20% down payment at today’s average mortgage rate would save over $300 a month compared to what it would have cost to buy the same home in October, when the average rate hit a 23-year high of 7.79%.

Still, there’s more to consider than the mortgage rate. It can cost thousands of dollars to refinance, and not all the fees can always be rolled into the new loan.

Breaking even on the costs of refinancing may take months or years, depending on the difference between your current rate and your new rate. So refinancing may not make sense if you’re planning to sell the home before that happens.

RELATED COVERAGE Average rate on a 30-year mortgage falls to 6.47%, lowest level in more than a year Homeowners race to refinance as mortgage rates retreat from 23-year highs Average rate on a 30-year mortgage falls to 6.73%, lowest level since early February

Here are some key factors to consider as you weigh whether now is the right time to refinance your home loan:

Are rates attractive enough to make refinancing worthwhile?

While mortgage rates have come down, the average rate on a 30-year home loan is still more than double what it was just three years ago.

Some 86% of all outstanding home mortgages have an interest rate below 6%, and more than three quarters have a rate 5% or lower, according to Realtor.com. If your mortgage rate falls within that range, you’ll want to make sure you can refinance to a significantly lower rate than you have now.

One rule of thumb to consider is whether you can reduce your rate by half to three-quarters of a percentage point, said Greg McBride, chief financial analyst at Bankrate.

“That’s when it’s time to start thinking about it,” he said.

Someone with a 30-year mortgage at 7.5% or 8%, for example, should be looking for rates to be in the low 6% range.

Homeowners with an adjustable-rate mortgage, or ARM, that’s set to adjust to a higher rate may also want to consider refinancing while rates head lower.

How long will it take you to break even on the costs of refinancing?

The break-even period on a mortgage refinance will be shorter the more significant your savings are. For example, if you’re refinancing from a rate of 8% down to 6%, the break-even period is going to be far shorter than if you refinance from 6.75% down to 6.25%.

So, it’s important to factor in how long you plan to live in the home, to make sure you’re going to make up the cost of refinancing.

Consider the overall and upfront costs

Charges and fees can shortchange refinancers who are focused only on the potential savings. And just because you can typically roll over many or most of the costs into a new loan doesn’t mean that loan is free.

If you’re rolling over the costs into your new loan, you’re either taking on a larger balance or you’re paying a slightly higher rate to compensate for those costs.

And there may be fees that you have to pay at closing, including costs for an appraisal, title insurance, a survey fee or local taxes outside the lender’s control.

Should you wait for rates to ease further?

Mortgage rates are influenced by several factors, including how the bond market reacts to the Federal Reserve’s interest rate policy decisions. That can move the trajectory of the 10-year Treasury yield, which lenders use as a guide to pricing home loans.

The yield, which topped 4.7% in late April, slid briefly last week to around 3.7% as nervous investors sought out the safety of U.S. bonds following worse-than-expected labor market data. Yields fall as bond prices go up.

Beyond that, signs of waning inflation have raised expectations that the Fed will cut its benchmark interest rate next month for the first time in four years.

If bond yields continue to decline in anticipation of the Fed lowering rates this fall, that could lead mortgage rates to ease further, though most economists expect the average rate on a 30-year home loan to remain above 6% this year.

But an argument could be made that the bond market’s expectations of a Fed rate cut have already been priced in, which could mean rates don’t come down as much in coming months.

If you’re on the fence on whether to refinance now or hold out for lower rates, it’s good to at least get ready and speak with your lender or shop around, so that you can move quickly when you’re able to lock in an attractive rate.

“We are likely to see mortgage rates trend lower, but rates can move suddenly and it pays to jump on it when the opportunity arises,” McBride said.