The Federal Reserve Just Cut Interest Rates. Is It a Good Time to Refinance Your Mortgage?

Fears of the deadly coronavirus have sent stock and bond markets reeling and recently prompted the Fed to cut interest rates. Amid the concern, there's one piece of good news for homeowners: Falling interest rates mean mortgage rates are coming down too — and that could mean hundreds of dollars in monthly savings for strapped family budgets.

After weeks of worry that the highly contagious coronavirus would snarl global trade, on Tuesday the Federal Reserve decided to act, cutting its benchmark Fed Funds rate by one-half a percentage point — in its first surprise rate cut since the 2008 recession. While the stock market's reaction has been mixed, the news sent already-low bond market yields even lower, with the key 10-year Treasury yield dipping below 1% for the first time ever.

That's good news for homeowners.

Mortgage rates, which peaked at nearly 5% in late 2018, have been falling steadily for 15 months. As of last Thursday, the average rate for a 30-year fixed-rate loan was 3.45%, according to Freddie Mac. The average rate for a 15-year loan was 2.95%, and for a five-year adjustable rate loan it was 3.2%.

Now many experts think the Fed's rate cut could send rates even lower. "With last week's mortgage rates hovering just...above all-time lows even before the large Fed rate cut, a new low in mortgage rates seems almost inevitable," said Realtor.com chief economist Danielle Hale in a statement Tuesday.

Many borrowers are already rushing to refinance. Loan applications for the week ended Feb. 28 more than doubled compared to this time last year, according to data from the Mortgage Bankers Association.

Is It a Good Time to Refinance?

Whether or not it makes sense to refinance can depend on a lot of factors, including what rate you currently pay and how long you plan to stay in your home. But one rule of thumb is that you should consider refinancing if you can lower your interest rate by at least half a percentage point.

Here's how the math looks: For a homeowner with a typical $250,000 30-year mortgage, cutting the interest rate from 4% to 3.5% — roughly in line with today's average rates — would save just over $70 a month, according to our mortgage calculator. If the mortgage started at 5%, the savings would be nearly $220 a month.

While that may seem extreme, rates on 30-year mortgages were as high as 4.94% in November 2018, and were above 4% for much of 2018 and the first half of 2019. So it's no surprise many homeowners who bought their homes in the past several years are rushing to apply.

Of course, if you do want to refinance there are downsides and other costs to consider. The process of paying off your old loan and getting a new one can be laborious — and expensive, with fees running $3,000 to $5,000. So make your plan to stay in your home long enough for the potential savings to outweigh the costs — typically that's at least five years.

Another thing to remember: refinancing a fixed-rate 30- or 15-year mortgage means starting the clock over as far as your loan term is concerned. That prospect may be unappealing to homeowners who have already been making steady payments for years and for whom finally paying off the loan is within reach. At the same time, anyone who bought just a few years ago with an adjustable rate mortgage may jump to lock in today's low rates.

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