The Fed Cut Rates – Is it Time to Buy or Refinance?

The Fed Cut Rates – Is it Time to Buy or Refinance?

Are you wondering if now’s the time to buy a home or refinance your current mortgage? Afterall, the Fed cut their interest rates twice in 2024 and even more cuts are expected this year. A lower interest rate means a lower monthly payment, more money in your pocket, and less interest paid over the life of the loan, 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 Fed’s rate cut percentage and how much all mortgage rates will drop. For example, if mortgage rates  were 6.5 percent before a Fed rate cut of .5 percent, the new mortgage rates won’t automatically be 6 percent after the cut, but they will likely trend lower. Given that more rate cuts are expected, we may continue to see a slow and steady decrease in mortgage rates throughout 2025. 

How to Determine if Buying a Home Now if Right for you.

If you've been considering purchasing a home, a Fed rate cut could offer a great opportunity to lock in a lower mortgage rate and save significantly in the long term. However, it's important to consider more than just interest rates when deciding if it's the right time to buy. While lower rates can make buying a home more affordable, you should also assess your personal financial situation. Are you financially ready for the responsibilities of homeownership, including a down payment, closing costs, and ongoing maintenance? Additionally, keep an eye on local housing market conditions—if home prices remain relatively high, it may impact your decision. Here are some simple steps you can take to determine if purchasing a home now is right for you:

Step one: Calculate your potential monthly payment. Be sure to test various scenarios such as home value, down payment amount, and interest rate to help you determine if now is the time to buy.

Step two: Contact your mortgage loan officer with any questions or to get your application started.

Ultimately, a Fed rate cut can create favorable conditions, but making sure you're prepared financially, and the timing aligns with your goals is key to a smart homebuying decision.

How do Determine is Refinancing Now is Right for You

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, you ultimately decide that purchasing a home or refinancing your current mortgage doesn’t make sense right now, it’s important to be patient and not lose hope. No one has a crystal ball for predicting when, how much, or how often the Fed will cut rates in the future. As rates fall, continue to calculate the affordability of buying or refinancing, and go with the decision that makes the most financial sense 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.