Mortgage Refinancing Could Save Americans $116,000

As mortgage rates retreat from October highs of more than 8 percent, Americans who purchased a home at that time may find a financial reprieve by refinancing their mortgages, with potential savings that could approach $116,000 over the course of a standard 30-year loan term.

Amid economic data released Tuesday pointing to the Federal Reserve continuing its rate hike pause when it announces its decision on Wednesday, the mortgage market is seeing a wave of potential savings through refinancing.

The average 30-year fixed rate dropped to 7.1 percent this week, down from 7.11 percent last week, providing homeowners who locked in rates at October's peak of 8.03 percent an opportunity to reduce their monthly payments.

The median sales price for single-family homes in October was $409,300, according to data issued by the U.S. Census Bureau. Refinancing to the current 7.1 percent rate from 8.03 percent on a new loan amount of $400,000 could mean a monthly savings of about $322, which is $115,598 over three decades.

The potential savings has triggered an uptick in refinancing, according to data from the Mortgage Bankers Association (MBA). The MBA's Refinance Index surged 14 percent from last week, with refinance applications seeing their strongest week in the last two months.

The surge in refinancing comes as a direct result of the Fed's rate increases, which began in March 2022, propelling borrowing costs to the highest levels in two decades. However, with inflation showing signs of easing, analysts are anticipating a stabilization of rates at their current levels, providing a conducive environment for refinancing and new mortgage applications.

Economists at Realtor.com predict that with the Fed likely to maintain the current interest rate, mortgage rates could settle into the mid-6 percent range by the end of next year.

However, according to TransUnion, there have been 3 million mortgages originated with interest rates of 6 percent or higher since January 2021 with a total balance of more than $1 trillion. The credit bureau said that the monthly payments of each of the high-interest mortgages averages $2,201.

For those homeowners, if rates come down to 5.5 percent, refinancing would still mean monthly savings of nearly $300.

"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," Michele Raneri, vice president of U.S. research and consulting at TransUnion, told Newsweek.

Assuming 24 months of a mortgage has been paid, savings of $284 per month would be $95,424 over the course of the new loan.