The fact that the Federal Reserve cut the federal funds rate twice in 2024 didn’t come as a surprise. The Fed was expected to take its benchmark interest rate down a notch in response to cooling inflation.
The Fed’s rate cuts are expected to continue in 2025, though. And for that reason, the new year could end up being a great time to refinance a mortgage.
Refinances could explode
In 2020 and 2021, mortgage lenders were swamped with refinance applications when mortgage rates fell to record lows. In 2025, mortgage rates are certainly not expected to fall to the levels borrowers enjoyed those years.
But as of this writing, the average 30-year mortgage rate is sitting at 6.78%. And there’s a good chance that mortgage rates will fall below 6% in the new year as the Fed continues making rate cuts. That could set a lot of people up to refinance.
To be clear, the Fed doesn’t set mortgage rates. But when its benchmark interest rate falls, consumer borrowing rates tend to follow that pattern. This means it’s not just mortgages that could get cheaper in 2025. We could also be in for more affordable auto loan rates, personal loan rates, and more.
Generally speaking, it makes sense to refinance a mortgage when you can lower your loan’s interest rate by about 1% or more. For much of 2023 and parts of 2024, mortgage rates were above 7%.
So if you locked in a mortgage rate of 7.25% and rates fall to 5.9% in 2025, that’s a wide enough spread for a refinance to make sense. And since many homeowners are expected to be in that boat, there’s a good chance mortgage refinance activity will pick up a lot next year.
How to get ready for a 2025 refinance
Refinancing your mortgage could result in lower monthly payments — and more financial breathing room. So if the idea of refinancing your mortgage in 2025 sounds good to you, there are a few key steps to take.
First, start researching lenders in your area to get a sense of your options. Also, check out this list of the best mortgage refinance lenders to see if any might be a good fit for you.
Next, check your credit score and work on boosting it if it’s below 800. Experian, one of the three credit bureaus, calls a score of 800 or above excellent. And with a credit score in that range, you put yourself in a great position to snag a competitive rate on a refinance.
Of course, if you can’t get your credit score to 800 or above, boost it as best as you can. Even a score of 720 will do you more good than a 620.
Boosting your credit score isn’t an overnight thing. But you can bring that number up by:
- Paying all of your bills on time
- Reducing balances on your credit cards so that ideally, they’re at or below 30% of your total credit limit
- Checking your credit report for errors and correcting misinformation that could be dragging your credit score down
There’s a good chance more homeowners will refinance their mortgages in 2025 if it brings lower mortgage rates with it. And if you’d like to be one of them, start doing the legwork now so that you’ll be in a great position to take advantage of those lower rates.