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With mortgage rates at their lowest in over a year, you might be wondering if it’s time to refinance to a lower rate, or if you should wait until you find a better deal. Here’s what to consider as the Federal Reserve prepares to cut interest rates.
Is there a rush to refinance now?
Whether you’re looking to lower your monthly payments or interest, shorten your loan term or want a more stable fixed rate, the right time to refinance your mortgage will depend on both market rates and your personal circumstances.
As of Aug. 20, the average annual interest rate for refinancing a 30-year mortgage was 6.57%, down from about 7% a month ago, according to data from Bankrate.
Why have mortgage rates suddenly dropped?
Mortgage rates began to fall in mid-July, driven in part by a decline in inflation in June, and then fell more dramatically in early August as market sell-offs fueled by concerns about a slowdown in the U.S. labor market and growing expectations of a Fed rate cut led to a sell-off.
Generally, you shouldn’t refinance unless it will result in significant savings.
“Once you’re able to shave 0.5% to 0.75% off your interest rate, that’s when you should start thinking about it,” said Greg McBride, CFA, principal financial analyst at Bankrate.
It’s also important to figure out your break-even point, which is the point at which the savings from your new, lower mortgage payment covers the upfront costs of refinancing. If you plan on moving anytime soon, it might not make sense to pay the fees on a new loan at a lower interest rate.
Should I wait to refinance until the Fed cuts rates?
And then there’s the Federal Reserve, which after a period of raising the federal funds rate and then keeping it there, began cutting rates in September and will likely continue to do so into next year.
“With the Fed expected to cut rates multiple times over the next year or two, it’s a reasonable assumption to see a consistent downward trend in mortgage rates over the next year,” McBride said.
The main reason to refinance a mortgage is to lock in a lower interest rate for a longer period. Many homebuyers and homeowners got record-low interest rates during the pandemic, when mortgage rates were in the 3% range. Nearly a quarter (24%) of mortgage borrowers now have interest rates above 5%, according to ICE Mortgage Technology.
There are no guarantees, of course, but with mortgage rates still hovering around 6.5%, there’s no real need to refinance right away,” McBride said.
“It might be wise to hold off a little bit for now,” said Sarah Alvarez, vice president and mortgage banker at Williams LaVais Mortgage, who expects rates to continue to fall over the next two years.
“This will allow you to take advantage of much lower interest rates down the line and avoid being caught up in what is essentially the ‘refinancing wave,’ where people are constantly looking to refinance,” Alvarez says. “After all, refinancing isn’t free.”
Still, the percentage of homeowners eligible to refinance — those in good standing with a credit score of at least 720 and 20% equity — reached its highest level in two years, according to ICE. The Mortgage Bankers Association reported that refinance applications jumped 35% in the week ending Aug. 9.
“For someone who had a fixed-rate loan at 8% interest rate at the peak of rising interest rates, refinancing to today’s average of around 6.5% could mean big savings,” Alvarez says.
