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What to know
- With mortgage rates dropping in recent weeks, more homeowners have jumped to refinance to lower rates.
- The Federal Reserve’s widely-expected rate cut in September could push mortgage rates even lower. It might make sense to hold off on refinancing until that happens, or even after, experts say.
- In any economic environment, the right time to refinance hinges on market rates and your needs and timeline.
With mortgage rates at their lowest level in more than a year, you might be wondering if now’s the time to refinance to a lower rate, or if you should hold out for potentially an even better deal. As the Federal Reserve gears up to issue interest rate cuts, here’s what to consider.
Is there a rush to refinance now?
Whether you want to lower your monthly payments and interest, shorten your loan term or crave a more stable fixed rate, the right time to refinance a mortgage depends on both market rates and your individual circumstances.
As of Aug. 20, the annual percentage rate on a 30-year refinance averaged 6.57 percent, according to Bankrate data, down from nearly 7 percent a month prior.
Why did mortgage rates suddenly drop?
Mortgage rates started to fall in mid-July, in part thanks to lower inflation readings in June. Rates dropped more dramatically in early August following a market sell-off stoked by concerns of a slowing U.S. labor market and growing expectations for a Fed rate cut.
In general, you shouldn’t refinance unless it’ll translate to meaningful savings.
“The time to start thinking about it is when you can shave one-half to three-quarters of a percentage point off your rate,” says Greg McBride, CFA, chief financial analyst for Bankrate.
It’s also important to figure out your break-even point: when the savings from the new, lower mortgage payment cover the upfront cost to refinance. If you plan to move soon, it might not make sense to pay the fees for a new loan at a lower rate.
Should you wait to refinance until the Fed cut?
Then there’s the Federal Reserve. After a period of raising and holding the federal funds rate higher, the Fed is set to start cutting rates in September, and likely on into next year.
“The expectation is that the Federal Reserve will be cutting interest rates multiple times over the next year or two, so a consistent downtrend in mortgage rates well into next year is a reasonable assumption,” McBride says.
The main reason to refinance your mortgage is to lock in a long-term lower rate. Many homebuyers and homeowners obtained record-low rates during the pandemic, when loans were in 3 percent territory. About one-quarter (24 percent) of mortgage borrowers today have an interest rate of 5 percent or higher, according to ICE Mortgage Technology.”
There are no guarantees, of course, but with mortgage rates still in the 6.5 percent neighborhood, there isn’t any particular urgency to refinance right away,” McBride says.
“Maybe it’s smarter to be a little patient now,” says Sarah Alvarez, vice president and mortgage banker with Williams Raveis Mortgage. Alvarez expects rates to continue to fall over the next two years.
“Then you will be able to take advantage of what will be significantly lower rates in the future, so you can avoid getting on — for lack of a better way to describe it — ‘the refi ride,’ where you are continuing to want to refinance,” Alvarez says. “Because at the end of the day, refinancing is not free.”
Still, the share of homeowners qualified to refinance — those with at least a 720 credit score and 20 percent equity, and in good standing — has hit its highest level in two years, according to ICE. Refii applications surged 35 percent the week ending Aug. 9, the Mortgage Bankers Association reports
“For someone who locked in at the peak of the rate hikes and is sitting at 8 percent, refinancing to today’s average of around 6.5 percent could mean significant savings,” Alvarez says.
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