Should I Wait For Future Fed Rate Cuts Before Refinaning?
This is the million-dollar question. Rates have dropped, and industry experts suggest that these lower rates already account for the expected Fed rate cut. Will we see more movement after the Fed acts? What about potential future rate cuts in the coming months or a year from now?
The answer depends on your current rate and the potential savings you could realize now versus waiting. While you don't want to be a serial refinancer, there’s no reason you can’t refinance again if rates drop low enough to make it worthwhile.
It's important to understand that the Federal Funds Rate and mortgage rates do not move in tandem. The Federal Funds Rate is the interest rate at which depository institutions (like banks) lend reserve balances to one another overnight on an uncollateralized basis. Set by the Federal Reserve, it is a key tool in monetary policy. Short-term rates, such as those for auto loans, credit cards, and home equity lines, typically move in sync with this rate.
Mortgage rates may be indirectly influenced by the Fed's rate changes as they affect broader financial markets. However, mortgage rates are more directly determined by the purchase and sale of Mortgage-Backed Securities (MBS), which are influenced by where investors believe the best returns are. Some investors track the 10-year Treasury note, which can impact mortgage rates to some degree, but the relationship is not direct.
3 Key Points:
How much do you lose in the monthly payment savings while you wait?
How much higher interest do you pay while you wait?
What could the savings do if you applied it to other needs?
Factors To Consider:
Current vs. Expected Rates: Predicting what rates will do in the future comes with uncertainty. Trying to time the market for the lowest point is not a winning formula.
Your Financial Situation: Evaluate your current mortgage terms, including the interest rate, remaining balance, and how long you plan to stay in your home. Compare these with potential new terms.
Market Trends: Keep an eye on broader economic trends and how they might affect mortgage rates. Sometimes, rates might not drop as much as expected even after a Fed cut due to other economic factors.
Refinancing Costs: Consider the costs associated with refinancing, such as discount points and closing costs. Do the potential savings outweigh these costs. A low cost loan means there is less risk should rates drop further and you want to refinance again. There are no free loans; however, there are ways to structure that minimize the cost. The PAR Interest Rate means that there are no Discount Points charged but you do pay other closing costs such as lender fees, appraisal, closing attorney, etc. If you select a slightly higher than PAR rate, a discount credit will be offered which is a credit in the form of a dollar amount used to offset closing costs. For example, let’s say you can get a 5.5% par rate and the closing costs are $2,500. At 5.75%, you may receive a credit that translates to $2,500 to offset the closing costs. Review your options with a mortgage professional.
