Refinance Now or Wait for Mortgage Rates to Drop?

The big news this week was that the Federal Reserve cut rates for the first time in 2025.

Naturally, those of us who bought homes in the past couple of years are starting to think about refinancing.

In case you missed it, here’s a key takeaway from the announcement, as reported by CNBC:

The Federal Reserve on Wednesday approved a widely anticipated rate cut and signaled that two more are on the way before the end of the year as concerns intensified over the U.S. labor market even as inflation is still in the air.

With the rate cute, the important question people are asking is: should I refinance my mortgage now or wait for rates to drop even lower?

Today, I’ll share exactly what I’m doing with my mortgage.

First, let’s discuss one common point of confusion.

The federal funds rate is not the same thing as mortgage rates.

When we see news like we did this week that the Fed is cutting rates, many of us think that means mortgage rates automatically drop.

Nope.

The federal funds rate is not the same thing as a mortgage interest rate. That said, mortgage rates are indirectly tied to the federal funds rate.

No need to overcomplicate things. The typical homeowner (and I include myself in this category) does not need to fully understand how mortgage rates and the federal funds rate relate to each other.

Instead, the typical homeowner just needs to know that when the Fed cuts rates, mortgage rates also tend to drop, but not always.

For those curious, here’s a quick synopsis from Bankrate:

The U.S. Federal Reserve sets borrowing costs for shorter-term loans by changing its federal funds rate. This rate dictates how much banks pay each other in interest to borrow funds from their reserves, kept at the Fed on an overnight basis.

While this rate isn’t the same as the rate you’ll pay for your mortgage, they are related. As the cost for banks to borrow increases or decreases, the cost for you to borrow tends to follow suit.

And when the Fed doesn’t change the federal funds rate, it generally encourages lenders to maintain mortgage rates in the current range.

The takeaway is that when the Fed cuts rates, it’s likely that mortgage rates will also drop.

But, there’s one more piece to the story.

Mortgage rates often drop before the Fed actually cuts rates.

It may sound backwards, but mortgage rates usually factor in pending rate cuts before the Fed actually announces its decisions.

To that point, look at how mortgage rates were already dropping over the past month in advance of this week’s announcement:

The Federal Reserve’s rate cut this week is rippling through the housing market, sending mortgage rates lower and spurring a jump in refinancing.

The 30-year fixed mortgage rate averaged 6.26% for the week ending September 18, down from 6.35% last week, according to data released Thursday by Freddie Mac.

This is the fourth-straight week of declines as mortgage rates fell in anticipation of the Fed’s quarter-point rate cut on Wednesday.

As you can see, mortgage rates were already declining for weeks in anticipation of the Fed’s rate cut.

The point is that it’s not always clear when the right time to refinance is. It’s not as simple as saying “the Fed cut rates, so now I’ll refinance.”

To help you make a good decision, I’ll walk you through my current thought process when it comes to refinancing.

First, here is some context about my personal situation.

I bought my home in early 2024 when rates were high.

When I bought my home in early 2024, we took out a 30-year fixed-rate mortgage at 6.875%. At the time, we were very pleased with a rate under 7%.

In the back of my mind, I hoped I would have a chance to refinance in the next few years. But, I didn’t hinge my decision based on whether I could eventually refinance or not.

I’ve long been an advocate for buying a house when the time is right in your life, regardless of mortgage rates.

My wife and I decided early last year that the time was right to buy our “forever home.”

I was about to turn 40. We had two kids and were thinking about a third. It felt like we had started to outgrow our small apartment in the city.

Of course, we enjoyed the short commute downtown. We liked walking to stores, restaurants and coffee shops. But, those opportunities to enjoy the city were harder to come by with two young kids at home.

Plus, my daughter was one school year away from starting kindergarten. We thought it would be nice if she made some friends in the neighborhood before kindergarten started.

Add it all up and the time was right for us.

Besides these personal factors, I had a suspicion that home prices were only going up.

For years, buyers in the Chicagoland area have struggled with a limited supply of quality homes. I had been watching the market and observed that the good houses went under contract quickly.

I had no way of knowing for sure that prices would continue to rise, but time has proven that we were right to buy when we did.

Since early last year, prices have only gone up in Chicagoland, despite elevated mortgage rates.

That’s why my advice is to buy a home when you’ve decided it’s the right moment in your life to do so. Make that decision regardless of what current mortgage rates are.

In other words, ignore mortgage interest rates.

Here’s why.

Why do I recommend you ignore mortgage rates when buying a home?

There are really only three things that can happen to mortgage rates over time.

Mortgage rates can:

1. Stay the same.
2. Go up.
3. Go down.

In any of those three scenarios, there’s no point in basing your decision to buy a home only on the current rates.

Let me explain. 

Let’s say you have a crystal ball and can look three years into the future. Looking into your crystal ball, let’s play out each of the three scenarios mentioned above.

1. Your crystal ball shows you that mortgage rates stayed relatively consistent. 

Since rates stayed the same, there would be no point in waiting to buy a home because of rates. The rates three years from now are the same as they are today. 

By waiting, you’re likely going to experience that homes have gotten more expensive. The longer you wait, the more expensive they are going to be.

This is exactly what has happened in Chicagoland where home prices are up more than 9% since just last year.

On top of the recent trends, the historical data confirms that homes have become more expensive. In 2024, U.S. homebuyers paid nearly double what they paid for homes in 1965, accounting for inflation.

So, even if rates stay the same, prices are likely to go up the longer you wait. In this context, you shouldn’t sit around waiting for them to drop. 

2. Your crystal ball shows you that mortgage rates went up.

If rates go up, it’s easy to conclude that it’s a mistake to delay your home buying decision. Higher rates, combined with higher prices, is… not good.

Let’s move on to the third scenario, which is the scenario people sitting on the sidelines are usually waiting for.

3. Your crystal ball shows you that mortgage rates went down.

This is the scenario that many people are waiting for. When rates go down, you can afford a more expensive home. That’s a good thing, right?

Not so fast. 

Do you think you’re the only person sitting around waiting for rates to drop? For the same reasons that you’re waiting, many other people are also waiting.

So, what happens when lots of people are waiting to buy the same thing?

Demand goes up. When demand goes up, you have more competition to buy that same house. That means prices go up.

You’ll end up paying more money for the house, even with a lower interest rate.

Take it from me, bidding wars are not fun. I would much prefer to get the house I want without the added competition. 

If mortgage rates end up dropping later on, you can always refinance (the topic of today’s discussion).

You may pay more on a monthly basis in the short term, but long term, you have the house you want at the best available current rate.

So, there you have it. No matter what happens to rates, in my opinion, you’re best off shopping for a home when the time is right in your life. 

And, this leads us back to our question of the day: is now the right time to refinance?

Should I refinance now or wait for mortgage rates to drop?

We would need to dust off our crystal ball again to know exactly when the time is right to refinance. Just like everyone else, I cannot predict if mortgage rates will continue to drop.

Rates have already been dropping for the past month in anticipation of the Fed cutting rates this week.

Plus, in the announcement, the Fed signaled two more rate cuts this year. That means rates may continue to drop.

Of course, there’s no guarantee the Fed will cut rates. Economic factors can always lead the Fed to change course. And, further rate cuts do not guarantee that mortgage rates will continue to simultaneously drop.

So, am I personally going to refinance right now?

For now, I’m holding off on refinancing.

My guess- and it’s only a guess- is that mortgage rates will continue to drop. In my current financial situation, I’m OK with taking that risk.

My current rate is 6.875%.

As a general rule, I wait to refinance until I can qualify for a rate at least 1% lower than my current rate. For this decision, I’m waiting until rates drop into the “5s.”

Besides the monthly cost savings, which could be substantial, I am excited for the potential emotional high of dropping my rates into the “5s.”

By the way, this is the emotional side of money that has nothing to with the numbers. It will just feel good to be under 6% for the next 30 years.

How will I know when I can qualify for a rate under 6%?

This is why you need to have a great mortgage broker on your real estate team.

I don’t have the qualifications or the time to closely monitor the mortgage rate market. By keeping in touch with my mortgage broker, he’ll know exactly where my head’s at.

Then, he can keep an eye on things for me and let me know when the rate I’m personally eligible for drops below 6%.

Never underestimate the importance of having a great mortgage on your side. The right broker can save you thousands and thousands of dollars over the long run.

If you need help evaluating mortgage brokers, check out my post:

How to Evaluate a Great Mortgage Broker for your RE Team

Is there risk involved with waiting for rates to drop?

Is there risk in waiting?

Absolutely!

Rates may not drop any further. They could even start to go back up.

I’m willing to take that chance right now.

I can comfortably afford my current housing expense, so I’m not desperate for the cost savings that might result from a refinance.

Plus, there are costs involved with refinancing.

Just like when you initially buy a home, there are closing costs associated with refinancing. Those costs can eat away at any savings generated by refinancing if your new rate is not low enough.

There are also time costs involved in refinancing. If you haven’t had the pleasure, it’s not a whole lot of fun to track down and provide all of the required documents to the underwriters.

At this point, those costs are too high for me to justify refinancing. That’s why I usually target a 1% drop in rates, which should be enough to make the cost and effort worth it.

Are you refinancing now or waiting?

Now you know exactly how I’m thinking through the decision on whether to refinance.

I’d like to see a 1% drop before I commit to a refinance. That will save me enough money each month to make it worth it.

It will also give me the emotional high of dropping into the “5s” for the next 30 years.

On the other hand, if rates don’t drop, I’m comfortable with my current situation.

Without a crystal ball, I feel good about this thought process.

Are you currently thinking about refinancing?

What factors are you weighing?

Let us know in the comments below.