Thanks to the Fed’s Big Cut, It Could Be Time To Refinance Your Mortgage and Save Money

On Sept. 18, 2024, the U.S. Federal Reserve delivered some good news when it slashed its benchmark interest rate by half a percentage point, representing the first cut since March 2020, when the pandemic began to affect the U.S. economy. The Fed also signaled plans to make a similar cut later this year and more yet in the years to come, which could make a big impact on borrowers’ plans to refinance as well as buy or sell a home.

Check Out: 5 Southern Cities Where You Can Buy a House for Under $100K

Read Next: How To Get Rich in Real Estate Starting With Just $1,000

While the multiple rate increases that culminated in July 2023 were designed to soften the effects of inflation, they also meant that borrowing was more expensive. Mortgage rates soared to 7.79% in October 2023 after dropping to an all-time low of 2.65% in January 2021. The average interest rate for a fixed-rate, 30-year mortgage loan in the United States was 6.059% as of Sept. 30, 2024.

For some potential homebuyers and sellers eager to move on to something new or for borrowers looking to refinance a high mortgage rate, this is ample encouragement to make an appointment with a mortgage lender. However, some remain hesitant, believing that federal funds rates will continue to drop in the months to come and that mortgage rates will soon follow suit. Interestingly, mortgage rates were already on the decline ahead of the rate cut .

It's Going Viral: Want to Retire Rich? Suze Orman Says You're Missing This Key Money Move

How Does It All Work?

Believe it or not, the Federal Reserve — aka the nation’s central bank — doesn’t set mortgage rates, though it does influence them. When it changes its federal funds rate, which is the interest rate banks pay each other for short-term loans, this, in turn, affects what borrowers pay.

Mortgage rates are affected by factors such as inflation, job data and reports, supply and demand in the market and the overall state of the economy. Although mortgage rates have generally dropped throughout 2024, it could still take several months or longer to see them dip well below 6%.

It is also important to note that the most popular type of mortgage, a fixed-rate home loan, tracks with the 10-year Treasury yield, while home equity loans and lines of credit (as well as credit card rates and other short-term loans) are influenced by the federal funds rate.

Even though mortgage rates do often fall in line with hikes and decreases in the federal funds rate, they have even more to do with what’s going on in the economy, inflation numbers and investors’ reactions to it all. If credit card rates are siblings with Federal Reserve rate cuts, then mortgage rates are second cousins once removed.

Find Out: 3 Best States To Buy Property in the Next 5 Years, According to Experts

Should I Refinance Now?

This is the question many are asking. Here are some things to consider as you make this decision.

• Refinancing often makes good sense if your new rate is at least 1% lower than your current one.
• If you plan to sell your home in the near future, however, the closing costs will likely make the refi process more work and cost than it’s worth. Some experts encourage borrowers to take a close look at the break-even point or how long it will take you to recoup closing costs. If this will take two or more years, you may wish to wait.
• If your credit score has improved notably since you originally took out a mortgage, that shift could also lead to a material advantage in your favor.
• If you’re on the fence about refinancing, take a look at your life circumstances: Will you be retiring in the near future? Or making a job change? Or something else that will impact your income? The decision on whether to refinance should be made with potential future monetary shifts in mind.

Likewise, mortgage rates are expected to fall further, which might mean that patience is still the name of the game.

More than a fifth of all active mortgages in the U.S. bear interest rates at or above 5%, and more than 14% exceed the 6% threshold. These loan holders might be more tempted to refinance as rates continue to move downward.

There is no refinancing genie that can magically make the decision for you. You can, however, talk with your financial advisor or mortgage lender to run the math and determine if you should refinance now or hold out for future rate cuts. Whether you are looking to refinance, buy a house or sell one, the recent rate cut is likely in your favor.

This article originally appeared on GOBankingRates.com : Thanks to the Fed’s Big Cut, It Could Be Time To Refinance Your Mortgage and Save Money