Should You Refinance Your Mortgage?

NEW YORK – The recent decline in mortgage rates has more Americans looking to refinance, and the Federal Reserve's expected rate cuts could make refinancing even more attractive heading into 2025.

In early August, refinance applications were up nearly 60% versus the same period a year earlier, according to the Mortgage Bankers Association.

The chance to refinance at a lower rate may be especially appealing for those who bought homes in 2023 when mortgage rates surged above 7%.

"If you've purchased a home in the past couple of years, you may want to take a look at where rates are today. That door to refinancing may well have opened up for you," said Greg McBride, chief financial analyst at Bankrate.

However, the Fed's interest rate decision isn't the only factor that will influence your decision to refinance. Here's what else to consider.

What is a refinance?

Refinancing is when you replace your current mortgage with a new one, often with the goal of lowering your interest rate and monthly payments.

Others may refinance to shorten the length of their mortgage or tap into their equity to raise money for a major purchase.

There are two primary options for refinancing your mortgage.

• No-cash-out refinance: This is the most common option. It's for borrowers who want to refinance their existing mortgage at a lower interest rate and potentially get a better monthly payment. Those looking to move from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage might also consider a no-cash-out refinance.
• Cash-out refinance: If you've built up considerable equity in your home, this option allows you to get part of your equity back in cash. With a cash-out refinance, you're refinancing your mortgage for more than you currently owe. Generally, that means a higher mortgage rate, but cash-out refinances could make sense for those looking to make home improvements.

Is it a good time to refinance?

Whether or not it's a good idea to refinance will depend on your current loan and your reason for doing so. Generally, you'll want to wait until market rates have fallen below your existing mortgage rate to make sure you can get a better deal.

While the average rate on a 30-year mortgage has dropped to 6.2% – the lowest level in 19 months – it's still more than double what it was three years ago.

A recent Redfin analysis found that 86% of homeowners paying a mortgage had an interest rate below 6%, which means most homeowners may have a hard time getting a better rate if they refinanced today.

For others, like those who bought homes last year when rates were above 7%, refinancing may be worth considering.

What is mortgage insurance and why would you need it?

As a general rule, refinancing could be worthwhile if you're able to reduce your mortgage rate by at least 1 percentage point, said Ralph McLaughlin, senior economist at Realtor.com.

At that point, the monthly savings start to look more attractive than the closing costs, which, according to Freddie Mac, average $5,000 on a refinance.

McBride said homeowners with an adjustable-rate mortgage (ARM) that's scheduled to reset in the next year may also want to consider refinancing sooner rather than later.

"You take advantage of the fact that fixed rates have come down, but you also lock in that certainty in terms of rate and monthly payment for years to come," he said.

Should I wait for interest rates to drop further to refinance?

The Federal Reserve is expected to cut interest rates multiple times before the end of the year, which could send mortgage rates lower into 2025.

"If you're just trying to refinance for rate and term, to get a lower rate, it might pay to wait here another six to nine months," said McLaughlin.

With that said, McLaughlin pointed out that timing the market is difficult because the Fed's benchmark interest rate isn't the only variable that affects home loans.

In fact, since the Fed's rate cuts are widely expected, the market has already started pricing them in, which means further mortgage rate drops will likely have much more to do with the overall health of the economy.

"The risk in sitting back and waiting for rates to fall further before refinancing is that there are no guarantees," McBride said. "We'd expected mortgage rates to come down in the first half of this year and it didn't happen."

According to Fannie Mae's August housing forecast, the average mortgage rate is projected to be 6.2% in the first quarter of 2025 before gradually declining to 5.9% by the last quarter of the year.

Even if mortgage rates continue to fall, both experts expect them to settle closer to 5% rather than the 2% to 3% rates seen during the pandemic.

Remember, you can refinance as often as you want, but you'll usually have to pay closing costs each time.

What should I consider before refinancing?

There are several factors you should consider before refinancing.

• How much equity you have.
• If your house is worth less than what you paid for it, then you might struggle to refinance your mortgage.
• Lenders often want applicants to have at least 20% equity before they consider refinancing a loan, according to Bankrate.
• Calculate your break-even point.
• The break-even point is how long it will take to recoup your refinance closing costs. The bigger the rate drop, the shorter the break-even period.
• For example, if your refinance costs $5,000 and you are saving $100 per month compared to your previous loan, it will take 50 months to cover your costs.
• How long you'll be in the home.
• If you plan to stay in the home long enough to recover the closing costs, then refinancing could make sense, but think twice if you intend to sell soon.
• Your debt situation.
• If your personal credit history has become worse since you took out your initial mortgage, your refinanced rate could be higher than you expect.
• Improving your credit score from Bad (under 600 FICO) to Very Good (750–800) can lower your mortgage rate by 39 basis points, according to a recent Realtor.com report.
• Finding the best rate.
• Shopping around can have a major impact on your mortgage rate with an average difference of 86 basis points between the least expensive and most expensive lenders, Realtor.com found.

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