When to refinance your mortgage

Choosing the best time to refinance

Lenders set the interest rates for their own loan products based on a number of factors including the yield on a 10-year Treasury note, risk and consumer demand.

Interest rates can be relatively stable for extended periods, or they can rise quickly in response to bad economic news or world events that destabilize the financial environment. Choosing the right time to refinance could save you thousands of dollars in mortgage interest payments.

What is a baseline rate?

The average homeowner in the United States sells or refinances within the first 10 years of purchase. That’s why lenders use the yield on a 10-year Treasury note to set the baseline for current mortgage interest rates.

However, because mortgages are a riskier investment for a lender than purchasing a note guaranteed by the U.S. government, lenders add a percentage to the Treasury rate to account for the additional risk of a mortgage default.

This difference between the 10-year Treasury note yield and the mortgage interest rate is known as the mortgage spread, and it can vary depending on a variety of events.

How seasonality affects mortgage interest rates

Seasonality plays an important role in determining when to refinance. The winter holiday season is a traditionally slow time in the real estate market; homeowners want to relax and avoid having prospective buyers visit their homes. Therefore, the demand for mortgage money is less, so lenders lower the spread in order to attract new business. This can be a great time to refinance.

On the other hand, the summer is typically an active time for home purchases, so lenders can afford to increase the spread, which results in higher interest rates.

How economic and world events impact refinancing

Mortgage lenders are very sensitive to risk, and bad financial news may cause them to immediately increase the spread. Triggers include:

• Sudden drop in the stock market’s S&P 500 index
• Rise in unemployment numbers
• Rise in inflation as measured by the Consumer Price Index
• Increase in the discount rate (the interest rate that the Federal Reserve charges member banks on borrowed money; these banks pass along the increased rate to borrowers in the form of a higher mortgage spread)

For more information about refinancing your mortgage loan, compare mortgage refinance options with us or contact one of our U.S. Bank mortgage loan officers.