Is Now A Good Time To Refinance Your Mortgage?

Key Takeaways

• Refinancing activity picked up significantly last week as mortgage rates began trending lower.
• With the Fed expected to cut its benchmark lending rate in the coming months, it may be worth waiting to refinance, some experts say.
• There are lot of factors to consider before you decide to refinance, irrespective of what the Fed does.
• Experts say, if you can score a two percentage point rate reduction or greater on your refinance, you may save money.

If you're a homeowner looking for rates to come down to refinance your mortgage, you're not alone. But experts suggest considering a number of factors before you make your decision.

Refinancing activity jumped last week as mortgage rates fell to their lowest levels in nearly a year. Rates fell further to start this week before climbing but remain well below recent highs amid expectations the Federal Reserve will cut its benchmark lending rate, which influences the costs of mortgages and all sorts of other loans, as soon as next month.

"I think now that rates are coming down, you’re going to see a lot more movement in the real estate market, "said Jason Siperstein, President and Wealth Advisor at Eliot Rose, noting that he's had many clients ask about refinancing in recent days.

But does refinancing make sense for you right now?

If You Can, Consider Waiting For a Better Deal

Experts recommend that homeowners wait a bit longer to refinance their homes if possible since refinance rates are likely to fall further if the Fed cuts rates in September and later this year.

“Wait, because now the market is definitely priced in two or three rate reductions from the Federal Reserve,” said Glenn Downing, a CFP and Principal at CameronDowning. “Put this [refinancing] off until next year.”

However, Siperstein believes your personal circumstances should dictate when you refinance—if your savings exceed the cost of refinancing, consider doing so, regardless of what the Fed does.

Before You Refinance, Here's What to Consider

One of the biggest considerations to keep in mind when refinancing are the expenses you’ll incur on your new loan like closing costs. The average closing costs on a refinancing are roughly $5,000, according to Freddie Mac, though they could vary depending the size of your loan and where you live.

To figure out if you would save money by refinancing, Downing suggests this simple rule-of-thumb: If you can shave at least two percentage points off your mortgage rate by refinancing, it might be worth paying the closing costs. 

Other factors you should consider are how long you plan to own your home and how much time you have left on your mortgage.

"If you're going to live in the home for under five years, then you'd have to be really careful about whether it's worth it to refinance, especially if you have to pay closing costs, [mortgage] points, or additional fees for refinancing," said Tony Matheson, CFP and Founder of Slalom Wealth Management. "When you start getting over five years, it gets a little easier to make that math work."

Since most of your payments at the beginning of your mortgage go towards paying off interest, Siperstein notes that people who are nearing the end of their mortgage term may not gain as much by refinancing because your final payments typically go toward the principal.