How to know if you should refinance your mortgage or buy a house

The Federal Reserve is poised to make the first interest rate cut in years this fall, which can influence mortgage rates to go down.

Even small cuts in interest rates could make a meaningful difference in what a homebuyer will pay. To that point, people in the market to buy a home have been eagerly waiting for the Fed to cut rates.

The Fed is meeting this week, but experts say it seems more likely that the first rate cut will come in September. That would be the first rate cut since 2020 in the onset of the Covid-19 pandemic.

While there is a less-than 6% chance of a rate cut in the upcoming Federal Open Market Committee  meeting, according to the CME’s FedWatch measure of futures market pricing, there is a much greater likelihood of quarter-point reductions in September, November and December.

That along with further cuts in 2025, would bring the the Fed’s benchmark fed funds rate to below 4% by the end of next year, some experts say.

While mortgage rates are fixed and mostly tied to Treasury yields and the economy, they are partly influenced by the Fed’s policy. Home loan rates have already started to come down, in part induced by a Fed slowdown.

Here’s what homeowners and buyers need to know.

The first rate cut is almost entirely priced into financial markets already, especially bond markets, said Chen Zhao, the economic research lead at Redfin, an online real estate brokerage firm. In other words, mortgage rates aren’t going to change much once the Fed actually begins to cut back, she said.

“A lot of these rate cuts are already priced in,” she said.

The 30-year fixed rate mortgage declined to 6.78% on July 25, down from the 7.22% high on May 2, according to Freddie Mac data via the Fed.

“Refinancing are starting to tick up, it’s not a huge wave yet, but they are starting to pick up a little bit as rates start coming down,” Zhao said.

Refinance activity on existing home loans was up 15% from the previous week, reaching the highest level since August 2022, according to the Mortgage Bankers Association. It was 37% higher than a year ago, MBA found.

Whether homeowners should refinance depends in part on what their existing rate is, said Selma Hepp, chief economist at CoreLogic.

“There are people that originated when mortgages peaked at 8% in the fall of last year,” Hepp said. For those buyers, “there is some opportunity there.”

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To be “in the money,” or when it makes sense to refinance, homeowners need to see a notable drop in mortgage rates in order to benefit, experts say. The prevailing rate should be at least 50 basis points below your current rate.

While that can be a good strategy, it’s not a “hard and fast rule,” said Jacob Channel, senior economist at LendingTree.

Timing the refinance of your home will depend on factors like your monthly mortgage payment and if you can pay closing costs, he said: “There’s a lot of variability.” (When you refinance a mortgage, you are likely to incur closing costs, as well as an appraisal and title insurance; and the total price tag will depend on your area.)

“The saving has to outweigh your upfront costs,” Zhao explained.

Even if your existing mortgage has a high rate, you might want to consider waiting until the Fed is further along in its cuts. The expectation is for rates to steadily decline throughout the year and into 2025, said Zhao.

If you are thinking about it, reach out to lenders and see if refinancing now or in the near future makes the most sense for you, said Channel.

While lower rates can come as a relief for cost-constrained homebuyers, the real effects of lower borrowing costs are still up in the air, according to Zhao.

For instance: If borrowing costs for home loans come down, there’s a chance more buyers will jump in the market. And if demand outpaces supply, prices might go up even more, she said. It can “offset the relief you get from mortgage rates,” Zhao said.

But what exactly will happen in the housing market “is up in the air” depending on how much mortgage rates decline in the latter half of the year and the level of supply, Channel said.

“Timing the market is basically impossible,” Channel said. “If you’re always waiting for perfect market conditions, you’re going to be waiting forever. Buy now only if it’s a good idea for you.”