Mortgage rates are down now that the Fed has started cutting rates. Is it time to consider refinancing?

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• The Fed lowered rates at its September meeting, and mortgage rates are down as a result.
• As the Fed cuts rates, mortgage rates should continue to fall. This means more homeowners will be able to refinance soon.
• It could make sense to refinance now. But since rates are going to drop further, it may be better to wait.

The Federal Reserve announced Wednesday that it will lower the federal funds rate by 50 basis points. Mortgage rates have dropped substantially in anticipation of this cut, and they remain low. As the Fed continues lowering its benchmark rate, mortgage rates are likely to go down further.

This means if you have a high rate on your mortgage, you may soon have an opportunity to refinance and lower your monthly payment. But should you refinance now to take advantage of today's low rates, or wait for more Fed cuts to see if rates drop further? Here's what homeowners considering a refinance need to know about this upcoming meeting.

How the Fed's rate cut could impact mortgage rates

Mortgage rates have already been dropping for several weeks now as markets geared up for an expected Fed cut. According to Freddie Mac, 30-year mortgage rates are down to 6.20%, nearly a full percentage point below where they were a year ago. 

But mortgage rates might not drop much more in response to this announcement. Mortgage rates often trend up or down ahead of expected Fed moves, but once a hike or cut is priced in, they tend to hold steady unless the Fed surprises everyone. However, because more cuts are expected this year, we should see rates continue to ease throughout the remainder of 2024.

The Fed, inflation, and mortgage rates

Mortgage rates are determined by many different factors, including broader economic trends and Fed policy moves.

Inflation started rising in 2021 and reached a peak of 9.1% in June 2022. In response, the Fed aggressively raised the federal funds rate. High inflation and rapid rate hikes pushed mortgage rates up to two-decade highs. 

Now, inflation is back down and nearing the Fed's target. Recent data has also shown that the labor market is cooling off, shifting the Fed's focus to the other side of its mandate — keeping unemployment low. This has made it likely that the central bank will cut rates multiple times in 2024 and 2025. As it does, mortgage rates should trend down, too (as will the rates banks pay on high-yield savings accounts).

What this means for homeowners thinking about refinancing

Interest in refinancing has grown as mortgage rates have gone down. New data from the Mortgage Bankers Association shows that mortgage refinance applications are up 127% compared to where they were this time last year. But not everyone has the opportunity to save by refinancing just yet. 

"For those existing homeowners who have taken on a higher mortgage rate over the past two years or are seeking to consolidate high-cost debt or finance renovations, a refinance may make sense given they likely have a mortgage rate above 7% and have positive equity built up," says Scott Haymore, head of residential pricing, capital markets, and product development at TD Bank. "Those homeowners that took on a mortgage before 2023 likely have a mortgage rate below 5% and a pure rate refinance may not make sense in the near term."

If you've been in your home for a while, you're likely already paying a rate that's lower than today's rates, so it wouldn't make sense to refinance. If you got your mortgage more recently, you could save on your mortgage payment by refinancing. 

Should I refinance now or wait for mortgage rates to drop more?

Haymore says it could be worth it to refinance now if you're looking to tap into your home's equity with a cash-out refinance. But for many homeowners, waiting for rates to drop more is a better bet.

"Those homeowners seeking to do a rate refinance should likely wait as mortgage rates are expected to continue to drop throughout 2025," he says. "Ultimately, my advice is always to speak with a trusted, experienced mortgage professional. They can help you navigate the market and find solutions based on your unique financial situation."

How to decide when to refinance your mortgage

"It's important to consider the terms of your existing loan, new life events, or changes in market conditions when deciding when refinancing is right for you," says Matt Baker, regional manager of mortgage originations at Navy Federal Credit Union.

If you're thinking about refinancing, use a mortgage calculator to see how much you could save on your monthly payment with today's rates. If your payment would drop significantly, it could be worth it. But don't forget to factor in how much it will cost to refinance.

"Homeowners should also inquire about the break-even point at which the savings from a lower monthly payment will offset the costs associated with refinancing," Baker says.

Freddie Mac says average refinance closing costs are around $5,000. You'll break even on your refinance when the amount you save each month is equal to what you spent to refinance. So, if your refinance costs $5,000 and you lower your monthly payment by $200, it would take you 25 months to break even.

The longer it takes to break even, the less you benefit from the refinance.