Should You Refinance Your Mortgage Now That Rates Are Dropping?

As mortgage rates edge down this month, more homeowners are looking to lock in a better rate and lower their monthly payments. Compared to this time last year, mortgage refinance applications have increased 118%, according to the latest reading from the Mortgage Bankers Association. The growth seemed to accelerate recently, with week-over-week applications spiking 35% as of Aug. 9.

The Uptick in Activity

The uptick in activity is because mortgage rates finally started to fall in early August after strong signs the Federal Reserve plans to cut benchmark interest rates soon. As Laurie Goodman, a housing finance policy fellow at the Urban Institute, explains, mortgage rates reflect what the markets think the Fed is going to do. In other words, future cuts by the Fed are already getting baked into today’s mortgage rates, which are hovering around 6.5% for a 30-year fixed rate loan.

But Is it a Good Time to Refinance Your Mortgage?

Still, the recent surge in refinancing may appear to be bigger than it is, Goodman says.

“Overall, applications are very, very low,” she says. “Being up 118% off of a really low number — is still a really low number.”

Who Should Refinance?

While rates are down notably from their peak, a large majority of homeowners already have interest rates lower than today’s rates. So it doesn’t make any sense for them to refinance. According to Urban Institute data shared with Money, over 88% of homeowners with outstanding mortgages have a rate below 6% as of July.

A Note of Caution

In fact, the largest share of homeowners, 26%, have a rate of 3% or lower. These folks likely refinanced (or purchased) during the pandemic when rates were historically low. At one point in 2021, rates even held below 3% for several months, according to Freddie Mac data. Goodman called this period a “once in a lifetime opportunity.” These folks especially won’t want to refinance for a long, long time — if ever.

The Cost of Refinancing

Goodman has a very rough rule of thumb: It usually only makes sense to refinance if you can get a new rate at least 0.75 percentage points lower than your current one. For example, if you had a 6.5% mortgage rate, using that rule of thumb, refinancing when rates dip to 5.75% could be a good idea.