The Federal Reserve's decision to hold interest rates steady, with an open stance towards potential rate cuts in 2024, could result in a surge in mortgage refinancing across the U.S., experts say.
As homeowners grapple with high interest rates on existing mortgages, the prospect of rate reductions offers potential for financial relief. Michele Raneri, vice president of U.S. research and consulting at TransUnion, told Newsweek that he anticipates a swift response from homeowners, foreseeing a wave of refinancing that could ease the financial burden for millions.
The central bank on Wednesday held its key interest rate steady at 5.25 to 5.5 percent for the third consecutive time, which is a boon for mortgage rates that are nearing the 7 percent mark after hitting highs of over 8 percent just two months ago. The Fed signaled potential rate cuts in the coming months, with projections indicating a possible total reduction of 0.75 percent by the end of 2024.
Powell Says Rate Is At Or Near Peak
Federal Reserve Chairman Jerome Powell, addressing the decision, reiterated the central bank's goal of restoring price stability by bringing inflation to its 2 percent target, but noted that its "policy rate is likely at or near its peak for this tightening cycle."
"It is hopeful that we are one step closer to an eventual reduction in interest rates," Raneri told Newsweek. "A reduction in interest rates could not only help in stimulating the mortgage origination market but could also provide an opportunity for millions of consumers who have recently taken on high interest mortgages to refinance and see significant impacts to their monthly budgets."
He told Newsweek that since January 2021, roughly 3 million mortgages have been issued with interest rates above 6 percent. A reduction in rates, even by a small margin, could lead to significant monthly savings for these homeowners, Raneri said, adding that "we expect those homeowners who are currently making payments on high interest mortgage loans to be among the first to take advantage" of the reduction in mortgage rates.
Refinancing Could Mean Big Savings
Raneri told Newsweek that the 3 million homeowners who have originated new mortgages with interest rates of 6 percent or higher are paying an average mortgage of $2,201 per month.
"If interest rates dropped to even 5.5 percent, it could result in significant savings for these homeowners, as refinancing at that rate could result in an average monthly payment of $1,917 for them, a reduction of $284 every month," he said. "This would represent nearly three hundred dollars a month that these homeowners would be able to use elsewhere in this continued high cost-of-living environment in which every dollar counts."
Some homeowners though, have originated new mortgages with interest rates of over the current rate of 7.02 percent, according to the Mortgage Bankers Association (MBA), and they're already taking action.
The MBA reported a 19.42 percent increase in refinance applications compared to the previous week, suggesting that some homeowners purchased their home at or near October highs.
The Fed's current stance could be the catalyst for a rejuvenating wave in the mortgage sector, Raneri says, providing much-needed relief and optimism for homeowners at a time when the cost-of-living is high.
Uncommon Knowledge
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Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
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Aj Fabino is a Newsweek reporter based in Chicago. His focus is reporting on Economy & Finance. Aj joined Newsweek ... Read more
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