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The Federal Reserve has put rate cuts on hold — again. For the second time this year, the Fed held short-term interest rates unchanged at its March 19 meeting.
The Fed is still planning on two rate cuts in 2025, yet the federal funds rate is not the only driver of mortgage rates. Will home loan rates finally drop significantly? If so, how fast and how far?
The bottom line for homeowners: Is now a good time to refinance your mortgage?
Learn more: How soon can you refinance your mortgage after buying a home?
The Fed effect on mortgage rates
The Fed uses shorter-term interest rates to influence bond markets and steer the economy. By hiking the federal funds rate, it aimed to reverse high prices by tamping down consumer demand. Then, late last year, the central bank lowered rates to fine-tune the economy. Now, with economic uncertainty in the air, the Fed is in a wait-and-see mode.
The Trump administration has taken aggressive economic actions that have triggered a period of transition. Federal layoffs, tariffs, and the risk of renewed inflation have tamped down yields on Treasury bonds. And that’s key. The 10-year Treasury moves mirror mortgage rates. It’s not a one-to-one interest rate relationship; there can be a 2% to 3% difference between Treasurys and mortgage rates. But the directional moves are coordinated.
Until markets settle, bond yields will continue to waver.
Dig deeper: How the Fed rate decision affects mortgage rates
So, how low will mortgage rates go?
Most mortgage market observers are looking for home loan rates to stay in the 6% to 7% range through 2025.
Was that a groan? Did you want to hear the magic 3% number?
Think of it this way: 7% is a good interest rate when you consider that the 50+ year average for mortgage rates is over 7.5%. Rates were in the 7% range way back in 1971 when Freddie Mac began keeping records.
"Mortgage rates continue to be relatively low versus the last few months, and homebuyers have responded," Sam Khater, Freddie Mac’s chief economist, said in a March analysis. "Purchase applications are up 5% as compared to a year ago. The combination of modestly lower mortgage rates and improving inventory is a positive sign for homebuyers in this critical spring homebuying season."
Read more: How to get the lowest mortgage rates
The rule of thumb for refis
In financial matters, people often search for easy answers. That's often where "rule of thumb" guidance comes into play. How much money do you need to retire? What percentage of your retirement portfolio can you safely spend annually?
It's the same for mortgage rates. The question often is: How much do interest rates need to drop before I should refinance into a new mortgage loan?
In the past, the easy estimate was 2%. Then, as rates fell, it was 1%. We've seen mortgage lenders say that a half-point — or even a quarter-point — drop in interest rates can make a refi worthwhile.
Every easy answer is mostly just noise. Like all rules of thumb, a quick solution is not often the correct answer. Any financial decision needs an answer derived from actual math.
Learn more: How does a rate-and-term refinance work?
Is now a good time to refinance? 5 steps to knowing the answer
Here's the five-step process to making a good decision when it comes to refinancing your mortgage:
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Know your current interest rate, your monthly payment, and your credit score.
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Determine if you'll refinance your loan balance or would prefer a cash-out refinance.
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Will you refinance for a loan term that equals or is shorter than the time remaining on your existing mortgage? (Preferred.) Or will you extend your debt? (Not preferred, but a worthwhile option in certain circumstances.)
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Get an estimate of your closing costs from a mortgage refinance lender (or preferably two or more).
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Determine how long it will take to recoup those new loan costs with your monthly savings on a lower interest rate. That's your break-even point. Is it equal or less than the time you plan on remaining in your current house? Good. Longer? Not good.
Now you have the answer to the question: Is it a good time to refinance your current mortgage?
Dig deeper: 6 times when it makes sense to refinance your home
A refinance backlog is looming
Rates won't have to move much lower to trigger a small wave of refinancing.
As of June 2024, real estate tech company CoreLogic estimated there were $579 billion in mortgage balances carrying an interest rate in the 6.75% to 7.5% range. Another $157 billion were at or above 7.5%.
That's a total of $736 billion of mortgages that could get relief when rates decline.
Learn more: How many times can you refinance a mortgage?
Is now a good time to refinance your mortgage? FAQs
Will the Fed's rate pause influence mortgage rates to move even lower?
The Fed is worried about a return to higher inflation and slower economic growth. Even without the central bank lowering short-term interest rates, such concerns can unnerve the bond market. That can cause mortgage rates to slip lower.
Is it a good idea to refinance a house right now?
It can be. Even if you're on the margin for a mortgage rate improvement, there are many good reasons to refinance. For one thing, Americans are sitting on a record $33 trillion of home equity, so many may choose a cash-out refinance — or a HELOC or home equity loan — to access that value for home improvements or other cash needs.
What is the negative side of mortgage refinancing?
The cost of refinancing isn't cheap. You'll pay from 2% to 6% of the total loan in origination fees and closing costs. And if you extend your loan term when you refinance, you'll pay way more interest over the life of the loan. Even no-closing-cost refinances have their pros and cons. Consider all of your options before jumping into a refi.
This article was edited by Laura Grace Tarpley.
