Homeowners who locked into mortgages prior to 2020 and didn’t refinance since may be sitting on decent interest rates. And homeowners who refinanced in 2020 or 2021, when mortgage rates plunged to record lows, are no doubt enjoying the ultra-competitive rates they locked in.
But in 2022, mortgage rates started rising at a pretty quick pace. And they’ve been elevated for the past couple of years, making homeownership less affordable for those who bought in 2023 and 2024.
If you signed your mortgage in the past couple of years, you may be itching to refinance to a lower rate. And that opportunity should present itself soon enough.
The Federal Reserve has officially begun cutting rates after implementing a series of hikes in 2022 and 2023 to slow inflation. In the coming weeks, mortgage rates could fall, leading to more refinance opportunities.
But while you may be eager to refinance immediately, waiting until 2025 could be a smarter financial move. Here’s why.
Sitting tight could result in a better deal
Refinancing a mortgage is not the sort of thing you want to do repeatedly — at least not within the same year or so.
The reason? When you refinance a mortgage, you’re charged closing costs that can amount to 2% to 5% of your loan. So if you owe $200,000 on your home, that’s $4,000 to $10,000 in fees you may have to pay to swap your current mortgage for a new one with more favorable terms. Since it makes sense to only try to refinance once on the heels of the Fed’s rate cuts, you may want to sit tight until 2025.
Now, the Fed did just lower its benchmark interest rate by half a point. And a cut that size could have quite a significant impact on not just mortgage rates, but borrowing rates on a whole in the near future.
But the Fed’s September interest rate cut is really just the first of several the central bank has planned. The more cuts you wait for, the lower your refinance rate might be when you sign your new loan.
Set yourself up to save big
While it pays to wait for at least a couple more interest rate cuts from the Fed to refinance your mortgage, one thing you can do now is work on boosting your credit score. The higher that number, the lower an interest rate you’re likely to qualify for.
You can increase your credit score by paying bills on time and reducing your current credit card balances. It’s also a good idea to check your credit report for errors.
If that report contains a mistake that portrays you as a less reliable borrower, it could hurt your chances of refinancing, or leave you stuck with a rate you’re less happy with. There’s no reason to take that chance when a simple review of your credit report could alert you to an error and give you an opportunity to fix it.