Some homeowners are rushing to refinance as mortgage rates are dropping.
By refinancing, how much can the typical homeowner save? Depending on where they are coming from, yes.
On March 6, the 30-year fixed-rate mortgage dropped to an average of 6.63%, the largest one-week decline since mid-September and the lowest level in three months, according to Freddie Mac (FMCC). The 30-year rate averaged 6.88% a year ago.
“This rate drop is already giving some current homeowners the chance to refinance,” Freddie Mac chief economist Sam Khater said in a statement. “In fact, the refinance share of market mortgage applications released this week reached nearly 44%, the highest since mid-December.”
Who is refinancing?
Some homeowners, including those who want to reduce their monthly mortgage payments, are refinancing their mortgages as a result of declining interest rates.
Redfin (RDFN), a real-estate firm, analyzed federal government statistics and found that 17.2% of U.S. homeowners with a mortgage have an interest rate of 6% or more. Since 2016, that share has been the highest on record.
According to Lisa Sturtevant, chief economist at Bright MLS, a reduction of even half a percentage point in interest rates, from 7% to 6.5%, on a mortgage for a median-priced $400,000 property with a 10% down payment saves the buyer almost $120 a month.
However, most existing homeowners have little incentive to refinance their mortgage in order to get a cheaper rate. According to Redfin, 21% of homeowners with mortgages have a rate below 3%, and 83% have a rate below 6%.
Making money off of house equity
Some homeowners may be taking advantage of their accumulated home equity when they refinance.
Cash-out refinances have been used by some homeowners to take equity out of their houses. With a cash-out refinance, they take out a larger loan at current interest rates to pay off the remaining amount on their existing mortgage.
The Consumer Financial Protection Bureau, a government agency, said in January that the most common reason borrowers provide for completing a cash-out refinance is to pay off other debt, including credit cards and auto loans. The study examined how borrowers behaved from 2014 to 2021.
Financing house reconstruction or repairs was the second most often mentioned cause.
Approximately $313,000 is the average homeowner’s equity in their home, according to Intercontinental Exchange data. With a 20% equity buffer, $203,000 of that sum might be borrowed against the house.
According to ICE, cash-out volume reached a two-year high of $21 billion in the fourth quarter of 2024, up 25% from the same period the previous year.
