When to refinance your mortgage as the Federal Reserve cuts interest rates

The U.S. Federal Reserve cut interest rates by half a percentage point, or 50 basis points, on Wednesday, its first rate cut since March 2020. However, homeowners shouldn’t bet on moving as an opportunity to immediately refinance the their mortgage.

That’s because “a lot of these rate cuts have already been priced in,” Chen Zhao, head of economic research at Redfin, an online real estate brokerage, recently told CNBC.

While mortgage rates are partly influenced by Fed policy, they are also tied to Treasury yields and the economy. Mortgage rates have already started to decline in recent weeks, slightly in part due to favorable economic data and signs that the Fed could cut rates.

As of Thursday, the average 30-year fixed-rate mortgage in the U.S. was 6.20%, according to data from Freddie Mac via the Fed. That’s down from this year’s high of 7.22% on May 2.

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It can be very difficult to time a mortgage refinance perfectly just by looking at mortgage rate activity, said Jeff Ostrowski, housing expert at Bankrate.com.

“It’s almost impossible to tell what mortgage rates are going to do from week to week or month to month,” Ostrowski said.

But there are ways homeowners can determine when a refinance makes the most sense for them, experts say, especially if more rate cuts are scheduled before the end of the year.

Here’s how to know when it’s time to refinance your mortgage, according to experts.

Refinancing activity rose to 46.7% of total applications in the week ended September 6, from 46.4% the previous week, according to to the Association of Mortgage Bankers.

While there has been an increase in refinancing as mortgage rates come down, “compared to the massive refinancing boom” in 2020 and 2021, “this will be a much smaller wave of refinancing,” Ostrowski said.

Most homeowners have mortgage rates below 5 percent, said Jacob Channel, senior financial analyst at LendingTree.

A refinance will primarily benefit a “small number of people” who bought homes “when interest rates were at 8 percent,” Ostrowski said.

Whether it’s smart for homeowners to refinance their mortgage will depend on factors like their existing borrowing and repayment schedule, experts say.

If you’re considering refinancing, take a close look at what’s happening with interest rates in the market, reach out to lenders and see if doing so now or in the near future makes the most sense for you, Channel said.

“The only person who can decide whether or not refinancing is worth it is you, based on what’s going on in your life,” he said.

Here are three criteria that can help you determine if a refinance makes the most sense for you:

1. You can lower the interest rate by 50 basis points or more

To know when refinancing makes sense, homeowners need to see a significant drop in mortgage rates in order to take advantage, experts say. The prevailing rate should be at least 50 basis points below the current rate, Zhao said.

But that’s not a “hard and fast rule,” Channel said.

Some experts set a higher bar: “It makes sense” to consider refinancing if interest rates have dropped one to two percentage points since you got the mortgage, Ostrowski said.

Even if your existing mortgage has a high interest rate, you may want to consider waiting until the central bank takes its cuts further. According to Zhao, the expectation is that interest rates will decline steadily through the rest of 2024 and into 2025.

2. You can afford the refinancing costs

There are two ways to pay for a refinance: with cash upfront or by rolling the costs into your new loan, boosting your monthly mortgage payment.

There’s no such thing as a free lunch when it comes to refinancing a loan, Melissa Cohn, regional vice president of William Raveis Mortgage in New York, told CNBC in August.

Generally, a refinance will cost between 2% and 6% of the loan amount you’re refinancing, Channel said.

For example: If your current loan amount is $250,000 and you refinance the total amount, expect to pay between 2% and 6% of $250,000, or about $5,000 to $15,000.

If you plan to refinance, make sure you can afford the associated costs, such as closing costs, an appraisal and title insurance. The total cost will depend on your region.

3. Your savings will exceed the cost

You can also consider the “breakeven point,” or the point at which your savings eclipse the cost of refinancing, Channel said.

Here’s an example to do this math: If you decide to refinance your mortgage and it costs $6,000 and you save $200 a month, divide $6,000 by $200. The result is the number of months you have before your refinance “pays for itself.”