Is now the right time to refinance a mortgage?

Refinancing may not pay off for most homeowners planning to move in the near future, according to Realtor.com senior economist Jake Krimmel. 

The key to refinancing, he said, is knowing if a move passes a rule called the "breakeven point," which looks at whether upfront costs are outweighed by the savings from a lower rate.

"Loan size, remaining term, and, most importantly, how long the borrower plans to stay in their home all matter," Krimmel said, noting that "a rule of thumb is closing costs divided by monthly savings." 

While the Federal Reserve cut interest rates for the third straight time, that does not necessarily mean mortgage rates will fall. Rates are not directly affected by the Fed's interest rate decision but closely track the 10-year Treasury yield.

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Even though policymakers signaled there could be only one rate cut in the new year as rates get closer to a neutral level, economists expect mortgage rates to drop slightly, hovering around 6.3% next year. 

While this decline isn't massive, only down from its average of 6.6% in 2025, it leads to questions about refinancing, Krimmel said. 

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Refinancing isn't free – homeowners still need to pay closing costs on the new loan, which is why it's important that savings from lower monthly payments over time outweigh those costs, Krimmel said. 

Refinancing only makes sense when the new mortgage rate is about 0.5 to 1 percentage point lower than what a homeowner already has because it offers enough savings to justify the costs of refinancing, according to Krimmel. 

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Today, most homeowners have mortgage rates far below current market rates, so refinancing would lose them money. This is what has commonly become known as the "lock-in" effect. For example, today, only people with a mortgage rate of 6.65% or higher would hit that breakeven point where refinancing might pay off. Currently, more than 80% of homeowners have mortgage rates below 6%, which means only a small group of borrowers would benefit from refinancing anytime soon.

So if someone is planning on moving soon, Krimmel said refinancing "likely" won't be worth it. 

The people who would benefit the most are those who bought homes recently – within the past two to three years – when rates were sitting between 7% and 8%. Even a small drop in market rates could put them more than 1% "in the money," making refinancing attractive. But these borrowers also tend to have large loan amounts and plan to stay in their homes for at least five more years, so refinancing savings would matter more.

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Meanwhile, any small rate drops "are pretty irrelevant" for homeowners who are "out of the money" or locked-in to low 3% to 4% mortgages. 

Homeowners also need to remember that it's not just about average mortgage rates reported but about what rate they can secure. Credit, down payments and shopping around are extremely important, and can matter more than swings in Fed policy, according to Krimmel.