The Fed Cut Rates – Should You Refinance Now?

The Fed Cut Rates – Should You Refinance Now?

Now that the Fed has cut their target interest rates by half a percentage point, you may wonder if it’s time to refinance your mortgage, particularly if you originated it between 2023 and 2024 when rates were at their peak of 7.22% or higher. After all, a lower interest rate means a lower monthly payment which means more money in your pocket, right? The answer is yes … and no.

First, it’s important to note that while the Fed’s rate cuts influence mortgage rates, they do not set rates. There is not a one-to-one correlation between the recent rate cut (.5 percent), and how much all mortgage rates will drop. For example, if they were 6 percent before the Fed rate cut, they won’t automatically be 5.5 percent after the cut, but they will likely trend lower. Given that more rate cuts are expected this year and into 2025, we’re likely to see a slow and steady decrease in mortgage rates into 2025. 

If rates drop to a level that could be beneficial to you, refinancing your mortgage to a lower rate generally means a lower monthly payment. But keep in mind there could be costs associated with refinancing that could range from $4,000 to $5,000 or more, depending on your loan size. Like your original mortgage, refinancing can require certain closing costs including an appraisal fee, title search fee, application fee, attorney fees, etc. The fees charged vary by bank or mortgage company, so consult your loan officer.

To determine if now is the right time to refinance your mortgage, it’s important to calculate your breakeven point. This is the amount of time it takes to recoup all the required closing costs through the savings gained from a lower monthly payment.

How to Calculate Your Breakeven Point

Calculating your breakeven point is simple:

Step one: Talk to your loan officer and add up all your refinancing closing costs.

Step two: Calculate what your monthly payment will be with the lower interest rate. Then, estimate your monthly savings compared to your current payment.

Step three: Divide your total closing costs by your monthly savings. This number shows you the number of months it will take to breakeven on your refinance.

For example, if all your closing costs add up to $5,000 and you estimate you will save $200 per month by refinancing to a lower rate, then your breakeven point is 25 months.

If you plan to stay in your home or keep your mortgage at that rate for more than 25 months, then refinancing your home probably makes sense. If you plan to sell your home in less than 25 months, it might not make sense to refi. Likewise, if you plan to continue refinancing to obtain a lower rate as the Fed potentially continues their rate cuts, refinancing now may not be the most cost-effective option because you will pay fees each time your refi your home.

Patience is Key

If, after calculating your breakeven point, refinancing your mortgage doesn’t make sense right now, it’s important to be patient and not lose hope. While no one has a crystal ball for predicting when, how much, or how often the Fed will cut rates in the future, many experts predict rates could go as low as by 5.5% by the end of 2025. As rates fall, continue to evaluate your plans to stay in your current home, calculate your breakeven point, and determine if refinancing is right for you.

If you would like to refinance now or have questions about whether refinancing your mortgage is right for your situation, an FNBO Mortgage Loan Officer is available to help. Give us a call today.