WSJ Your Money Briefing - Amid Lower Interest Rates, Is it Time to Refinance?

Episode Date: September 20, 2024

This week’s interest-rate cut by the Federal Reserve could make refinancing more attractive for homeowners saddled with higher mortgage rates. Wall Street Journal personal finance reporter Veronica Dagher joins host J.R. Whalen to discuss what to consider before deciding to refinance. Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

OCI is the single platform for your infrastructure, database, application development, and AI needs. Do more and spend less like Uber, 8x8, and Databricks Mosaic. Take a free test drive of OCI at oracle.com slash wall street. Here's your money briefing for Friday, September 20th. I'm JR Whalen for the Wall Street Journal. It's been a tough couple of years for homeowners hoping to refinance to ease the strain on their household budget. Mortgage rates have come down but in many cases not enough for a refi to make financial sense. This week's move by the Federal Reserve to cut interest rates could help change that.

The lower rate is attractive to people who bought in the last two years and have higher rate mortgages. With rates just above 6%, some 4.2 million borrowers could lower their rates by at least 0.75 percentage points in refinancing. And that's the most since early 2022. Our personal finance reporter Veronica Dagger joins us to discuss questions to ask before deciding to refinance your mortgage. That's after the break. AI may be the most important new computer technology ever, but AI needs a lot of processing speed and that gets expensive fast. Upgrade to the next generation of the cloud, Oracle Cloud Infrastructure or OCI.

OCI is the single platform for your infrastructure, database, application development, and AI needs. Do more and spend less like Uber, 8x8, and Databricks Mosaic. Take a free test drive of OCI at oracle.com slash wall street, oracle.com slash wall street. After the Federal Reserve lowered interest rates by half a percentage point this week, does it make more sense for homeowners to refinance? Wall Street Journal personal finance reporter Veronica Dagger joins me. Veronica, first of all, just briefly explain what a refinancing allows a homeowner to do. A refi allows a homeowner to essentially swap out their current mortgage for a

lower-rate mortgage or a mortgage with a different term or there's a certain type of refinancing that allows people to take cash out of their home, and that's called a cash-out refi. The payoff time can vary depending on the refi you choose. Ideally, you don't want to make your payoff time longer because in the long run that could result in you paying more interest. Your monthly payments, this is why a lot of people do a refi, because they're feeling a bit smothered by their monthly payments for their current why a lot of people do a refi because they're feeling a bit smothered

by their their monthly payments for their current mortgage and they'd like to make those payments smaller. And so that's why they wish to refi. We have to do the math because just because you refi doesn't mean you're going to have lower monthly payments. Every lender is different in terms of what they offer. Now it's not a one to one relationship but how does the Federal Reserve's move this week change the prospects for refinancing for homeowners? With rates lower, more people are going to be looking at refinancing their mortgage. A lower rate is attractive to people who bought in the last two years and have higher rate

mortgages. So there's a stat from Intercontinental Exchange that says with rates just above 6%, some 4.2 million borrowers could lower their rates by at least 0.75 percentage points in refinancing. And that's the most since early 2022. That can be an attractive prospect for some homeowners who are feeling a bit stressed by their monthly mortgage payment. The average 30-year fixed rate has come down from about 8% a year ago to close to 6% now. How does that translate to savings if a homeowner refinances?

Everybody's situation is different, but the average REFI candidate with a high credit score and significant equity in their home, that's at least 20% equity could save about $299 a month by refinancing given today's mortgage rates. You mentioned the credit score how significant is someone's credit score in this? It really makes a huge difference because A if you're even eligible to refinance you have to have a certain, at least a good score to refinance. And also the best rates are going to go to the people with the best credit scores. In terms of mortgage rates, what do financial professionals say is the benchmark a homeowner should consider when deciding whether to refinance?

In general, if you can cut your mortgage rate by one-half percentage point or more, it typically makes sense to refi. Definitely want to shop around and see what rates are available, talk to different lenders, but so much of this is a question of timing. Given rates are likely to keep falling, you might be able to cut your rate further if you wait till sometime in next year because if mortgage rates fall more, you stand to save more if you wait till sometime in next year, because if mortgage rates fall more, you stand to save more if you refi. What other factors should homeowners consider? Like does it matter if you think you might move at some point?

If you think you're going to move before what's called the break-even point, which is essentially the time it takes to pay off the refinancing itself, you probably shouldn't bother to refinance. It won't be worth it financially. But when people are thinking about refinancing, they do it for various reasons. So if right now you're in a situation that you are very strapped, your mortgage monthly payments are really stressing you out, and you're having trouble making them, it is generally better to refinance now and get a little more breathing room in your day-to-day budget than it is to wait for a year and then in the meantime struggle to pay your

mortgage. Also if you have a big bill coming up like your kids college tuition is due and you're wondering how you're going to have the cash for it and you do have some equity in your house and you qualify for a refi, this could be a way to tap that equity and take some of that financial stress off. And there are often charges and fees involved in a refi, right? Yeah, it's typically between 2 and 6 percent of your loan's value in closing costs. So it can be a big chunk of change for some folks. We've been talking for the most part about fixed rate mortgages. How is the equation different for people with adjustable rate

mortgages? It's very possible that you're in a situation where your adjustable rate mortgage is about to reset higher after its initial fixed period. And if you're in that situation you do the math and you realize your adjustable rate mortgage is going to reset to a higher rate than the standard 30 year fixed mortgage is right now. If it's going to go higher than, say, 6% or so, you'll probably want to refi and lock

in a lower rate. Just to be clear, somebody has an adjustable rate mortgage. The rate they get after the refinancing, that's a fixed mortgage? Typically, what people do is they refi from an adjustable rate mortgage to a fixed rate mortgage. It usually makes the most sense to do that. All right, let's talk real world numbers for a moment. You spoke to a man in North Carolina who bought a home about two years ago

and is considering a refinance. How did the numbers work out for him? Right now, he has a 7.2% mortgage on his home that he bought about two years ago and like so many other buyers at that time, paid pretty high mortgage rates relative to the time period compared to some neighbors who had a 3% mortgage. He's like, oh, I want to refi this mortgage and I'm waiting each day to look at that so I can refi. So he's hoping he can get a roughly six percent refi rate with

no closing costs. Given his personal financial situation, he's expecting the new loan will free up almost $1,000 a month in free cash flow and so that's exciting to him. In your story you wrote about how some homeowners could get a lower rate without doing a full refi. How would that work? So say you close on your loan and your rate is like 5.75 percent and then in a year your bank is offering a rate of 4.75 percent. Certain banks might allow you to reset that rate by paying a fee avoiding the entire refi process and the cost of a refi. They typically charge a

fee. It can vary widely. I've seen estimates of $900. I've seen estimates of $2,000. It really depends on the lender. But it's a nice way to reset your rate without going through the whole process of a refi. That's WSJ reporter Veronica Dagger. And that's it for your money briefing.

Tomorrow we'll have our weekly markets wrap up. What's news in markets? And then we'll be back on Sunday for the second episode of our new series, Your Money, Your Vote, where we'll dive into how the presidential candidates plan to lower your tax bill. This episode was produced by Zoe Culkin. I'm your host, JR Whalen. Jessica Fenton and Michael LaValle wrote our theme music. Our supervising producer is Melanie Roy. Aisha Al-Muslim is our development producer. Scott Salloway and Chris Zinsley are our deputy editors. And Falana Patterson is The Wall Street Journal's head of news audio.

Thanks for listening.