The Fed’s recent 0.50% rate cut might not move the needle much for mortgage rates. The national average 30-year fixed-rate mortgage had already decreased by 1.13% since May 2, 2024. The bond market had already “priced in” some Fed rate cuts, so when the Fed actually announced its 0.50% rate cut on Sept. 18, 2024, it wasn’t a big surprise.
However, the Fed is probably not done cutting the federal funds rate — it’s just getting started. The Fed’s own forecast says that it expects to reduce its benchmark rate by another 0.50%-1.50% by the end of 2025. If these additional rate cuts happen as expected, and other economic data is favorable, mortgage rates could be lower in 2025.
Lower mortgage rates are generally good news for home buyers. The housing market has largely been “frozen” for the past two years, with limited inventory, high prices, and high mortgage rates. But at the current moment when national average 30-year fixed rate mortgages are 6.09% (as of Sept. 19, 2024), there’s one group of people who could be the biggest winners: current homeowners.
If you already own your home, see why now could be a good time to refinance your mortgage — and why you might gain the most from lower interest rates in 2025.
Current homeowners: Now could be a good time to refinance
If you bought your home in 2022 or 2023 and got a mortgage rate of 7% or higher, right now could be a good time to refinance at a lower rate. That’s because a general rule of thumb is that it’s a good deal to refinance if you can get a new mortgage with an interest rate that’s at least 1% lower than your current mortgage.
For example, let’s say you bought a $400,000 home (with a 20% down payment) in August 2023 with a mortgage rate of 7.09%. Let’s say you could refinance today in September 2024 at 6.09%, lowering your interest rate by 1%. By refinancing, your mortgage payment would go down by about $210 per month.
America might be at the beginning of a mortgage refinance boom. CNBC says that in the week after the Fed’s 0.50% rate cut, mortgage refinance applications increased by 20%. Current homeowners could be big winners from lower mortgage rates if they can use these rates as an opportunity to free up more money into their monthly budgets.
But keep in mind that refinancing a mortgage is not the right choice for everyone. Before you refinance, make sure that it’s actually a good deal for your situation. Ideally, your lower monthly payment or other savings from the refinance should more than make up for the costs of refinancing the loan, such as origination costs, closing costs, and other fees.
Calculate your breakeven point — how many months you need to stay in the house at the lower payment to recoup your refinance closing costs. If you don’t expect to keep living in the home long enough to recoup the costs, refinancing isn’t worth it.
Ready to move? Pack your home equity
Another group of existing homeowners who could be big winners from low mortgage rates are people with equity who want to move to a new home. Many current homeowners bought their homes (or refinanced) during a time of historically low mortgage rates in 2020-2021 — like 2.65%-3.50% mortgages. This was a unique situation in the housing market.
Then in 2022, mortgage rates skyrocketed, going up by as much as 4% compared to the end of 2021. Higher mortgage rates during 2022-2024 kept many homeowners in place, even if their families had grown or their lifestyles had changed and they wanted a new house or new location. Instead of putting their homes on the market, many homeowners opted to keep their low mortgage rates.
Good news: If you’re a current homeowner with a home that has gone up in value during the last few years, lower mortgage rates could finally make moving to a new home a good deal for you. This could be a perfect opportunity for existing homeowners to cash out of their equity by selling their home, and move to a new rung on the property ladder.
Bottom line
Mortgage rates might not get low enough anytime soon to make life much easier for first-time home buyers. But if you’re an existing homeowner who wants to refinance your mortgage, or a longtime homeowner who has built up equity in a higher-priced home, lower mortgage rates could help you get a better deal on your monthly payment or trade up to the home of your dreams.
