Is it time to refinance my mortgage?

I’m writing this article about a week before the anticipated rate cut starting in September 2024. Whether the Fed cuts the rate by 0%, .25%, or .5%, the information here is still valid. I say that because I’ve been seeing articles popping up on every finance site I follow suggesting that it’s time to refinance your mortgage. Or, at the very least, articles are popping up posing the same question that I ask here.

For the vast majority of mortgage holders out there—no, it isn’t time to refinance.

The reason the question is being posed in various circles online is because the mortgage rates started coming down in August. Every time that happens, whether it’s a .01% or 1% change, this question starts flying. Based on the numbers I see today, there is no reason to go ahead and refinance. I’ll explain why.

First, all indicators suggest that if the Fed cuts the rate in September, it will be the first of many to follow. Since refinancing a mortgage is a headache, why go through that now if you will be tempted to go through it again in 6 months? There are closing costs with each refinance. If you are going to pay those each time, why not wait until the optimum time and only pay for it once? It’s better to wait until the end of the rate cutting. That way, you lock in the best rate compared to a slightly better rate. For example, if your rate drops .5% this month, but the rate is believed to drop another full 1% in a few months, that means you would save a total rate of 1.5% if you wait.

Second, there is a VERY SLIM chance that your current mortgage rate is higher than the new rate drop in September. Refinancing only makes sense in two scenarios: 1) your rate drops by at least 1% or 2) you get a big cash flow increase by refinancing. I hear from my mortgage department at my employer that customers keep calling asking if it’s time to refinance. All of them are in a current mortgage rate below 5%. Why would you refinance if the rate drops from 6.75% to 6.5%? You’re still in a much better rate to begin with!

I hate that finance sites write articles that create confusion for the average visitor. When any interest rate changes by .001%, then the news is that it “tanked” or “skyrocketed” and people react. Don’t simply read the headlines—read the actual numbers in the article. I am extremely skeptical when I see a headline like that. Rarely do I see a change in rates that warrants that type of hyperbole.

Bottom line: don’t panic. If your mortgage rate is below 5%, refinancing won’t be an option for you for a long time. The only reason to refinance in that situation is if you need to free up some cash flow.