According to recent developments in the financial sector, the Federal Reserve Board decided to reduce the federal funds rate in September. Although this action does not directly influence mortgage rates, it often prompts individual banks to lower them, causing a general decrease in mortgage rates. As a result, many individuals start contemplating refinancing their mortgages.
The appropriate time to commence the mortgage refinancing process can be challenging to determine, especially amid potential rate declines. The timing of a home purchase significantly affects the refinancing decision. For those with mortgage rates below 5%, refinancing may not seem beneficial at present. However, individuals who purchased homes in November 2023 might face rates near 8%, contrasting with rates just above 6% for those who bought in February 2023.
During the week of October 10, 2024, the average 30-year fixed mortgage rate was 6.32%. This rate makes refinancing appealing for some but not all, based solely on rate comparisons. However, pursuing a cash-out refinance might still be a viable option for those considering significant home projects. The timing of refinancing is crucial. If refinancing does not significantly reduce monthly payments or support achieving substantial goals, it might be prudent to wait until 2025 to engage with a lender.
Projections from the CME Group’s FedWatch tool suggest that the lowest rates might emerge around the June 2025 Fed meeting when the federal funds rate could potentially decrease to approximately 3.75% from the current 5.13%. While there is no direct correlation between mortgage rates and the federal funds rate, the spread between them currently stands at about 1.20%. Should this spread remain constant, a reduction in the federal funds rate to 3.75% could result in refinancing rates around 5%.
Refinancing from 6.25% to 5% represents a significant rate drop. For instance, assuming the purchase of a median-priced home at $415,000 in April 2023 with a 5% down payment, the principal and interest payment would be $2,427. As of January 1, 2025, the remaining balance would be $385,971. Considering refinance closing costs of 5%, the financial implications of different interest rates are outlined below:
| Interest Rate | Monthly Payment | Cost to Refinance | Difference in Monthly Payment | Time to Break Even |
|——————-|—————–|——————-|——————————-|————————–|
| 6.25% Mortgage | $2,427.47 | N/A | N/A | N/A |
| 6.00% Refinance | $2,314.09 | $19,298 | $113.38 | 14 years, 2 months |
| 5.50% Refinance | $2,191.50 | $19,298 | $235.97 | 6 years, 8 months |
| 5.00% Refinance | $2,071.98 | $19,298 | $355.49 | 4 years, 5 months |
Deciding whether to refinance can be simplified by calculating these figures and considering future plans. Individuals should commence the refinancing process when average interest rates are half to a full percentage point below their current rate. Mortgage lenders can provide real-time insight into market conditions to lock rates appropriately. Waiting for rates below 5% might extend the decision period, incurring additional interest costs during the interim.
