This Is How Much the Average American Saves Through Refinancing

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Right now, most people are refinancing their mortgages to access equity, rather than to save money. Here’s what that means for homeowners as we enter 2024. 

When most people buy a house, they tend to hold two common beliefs: First, that it will likely be the biggest single purchase they’ll ever make. Second, that they’ll have the option to refinance in the future to potentially save money. The first tends to be true for most. But, regarding that second point, certain factors may make refinancing a less appealing option.

If you own a home, here’s what you should know about this common money-saving tool.

Average mortgage refinancing savings

Refinancing is often a tool for saving money on a loan by securing a lower interest rate and other, more favorable terms. But refinancing is a lot less popular than it was just a couple of years ago. And when you consider the state of interest rates, it makes sense that the primary use for those who do refinance appears to be tapping into equity, rather than scoring a lower rate.

According to the latest data from Black Knight, cash-out refinancing accounted for 92% of all refinanced mortgages in the third quarter of 2023. And, according to Freddie Mac, borrowers who refinanced saw an average rate increase of more than 2 percentage points during the first half of 2023.

For context, a cash-out refinance loan lets you access the built-up equity as a lump sum payment, typically to pay off other debts and make home repairs. In exchange, you get a larger mortgage with all new terms, including new closing costs. So while you can get a solid chunk of change by using this refinancing option, you may also end up paying more for your mortgage, particularly if you get a higher interest rate or longer loan term.

Because of the high rate environment, and the fact that the vast majority of refinancing is cash-out refinancing, it would appear that the average American isn’t really saving money on their mortgage by refinancing right now, though they are getting a large cash influx.

What you should know about refinancing in 2024

As noted, interest rates are much higher than they were just a few years ago. That means you may find it difficult to score lower rates if you’re looking for traditional mortgage refinancing, particularly if your credit isn’t perfect and you got a lower rate when you first bought your home.

It’s not all bad news though: While now may not be the ideal time to refinance if you’re looking to save on your mortgage, that doesn’t necessarily mean refinancing in 2024 is completely out of the question. The Fed has indicated that it’s gearing up for three rate cuts in 2024, which could translate to lower mortgage refinancing rates. Whether that’ll be enough for the move to make sense, however, will depend on your current rate as well as the state of your finances.

Keep in mind that you still shouldn’t try to time things for the lowest possible rate, though. You’d run the risk of missing the entire rate dip. Consider your options when your finances are in good shape, and take the offer that has the best combination of savings and affordability.

Again, because refinancing requires you to pay closing costs, you’ll need to make sure that the savings you’re getting from refinancing make sense given how long you plan on staying in your current home. For example, if your current rate is 6.5% and refinancing closing costs would cost you $3,000, shaving off a point from your interest rate may not make sense if you’re planning on moving in just a couple of years. That’s because you’d need about two years just to recoup the closing costs. If your goal, however, is to save on monthly costs, the $130 cut to your monthly payment may still make sense. But it really depends on your situation.

It can be somewhat disheartening to hear that Americans aren’t actually saving money with mortgage refinancing right now. However, it can still be a useful tool for homeowners looking to save money if you focus on boosting your credit and keep an eye out for savings opportunities that match your needs.

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