The US Federal Reserve cut interest rates by half a percentage point, or 50 basis points, on Wednesday, its first rate cut since March 2020.
Even before the Fed cut interest rates, some homeowners were already taking advantage of recent declines in mortgage rates. Refinance activity rose to 46.7% of total applications during the week ended Sept. 6, up from 46.4% the week before, according to the Mortgage Bankers Association.
Others were waiting for the Fed to act. At that point, 18% of consumers said they planned to refinance a loan once interest rates drop, according to a report from NerdWallet. The financial services website surveyed more than 2,000 U.S. adults in July.
But it may be too early to take advantage of mortgage refinancing.
“You want to wait until rates get to a level where you’re happy to hold that rate for a period of time,” said Melissa Cohn, regional vice president at William Ravis Mortgage in New York.
Additionally, experts say that applying for a refinance doesn't mean you'll get approved. The lender may reject your application.
“No matter what the Fed does, no matter what happens in the broader economy, remember that you have a role to play in all of this as well,” said Jacob Channell, chief economist at LendingTree.
More Personal Finance:
Troublesome Medical Bill? Take This Important Step
Appliance repair costs are no joke.
How to Avoid the 'Tax Bomb' From Your Inherited Retirement Account
Factors That May Limit Your Ability to Refinance
1. Your financial situation has changed.
Make sure your finances are in order, or the lender may not agree to refinance your mortgage, experts say.
Applying for a refinance is similar to applying for a mortgage. A change in your financial situation, such as being laid off, having a decrease in income, or having more debt, may mean you are no longer eligible for a mortgage.
“Your mortgage rate and whether or not you get approved for a loan or refinance … it depends on you,” Channell said.
Think about all the “variables that helped you get approved in the first place,” says Cohen, such as your credit score, your income, and how much debt you’ve recently taken on. Changing these variables could impact your ability to get approved.
2. You haven't had your loan long enough.
How quickly you can refinance your mortgage depends on the term of the loan and the lender's requirements.
You can refinance within days of closing with some types of loans, while others may require a full year of payments, according to LendingTree.
3. I recently refinanced.
Technically, there is no hard limit on how many times you can refinance your mortgage, Channell said.
But some lenders may have to wait, he said. In such scenarios, if you refinance today, you may not be able to do so again in December if rates fall after the Fed’s last meeting of the year.
“While there may not be a hard limit on how many times you can refinance, you probably don't really want to do it that often,” he said.
You pay closing costs every time you refinance, “so you don’t want to spend money unwisely,” Cohn said.
It may be in your best interest to consider refinancing your mortgage only every few years, if your financial situation changes or if rates drop “really dramatically,” Channell explained.
“Otherwise, you put yourself in a position where you're spending so much money on refinancing that your monthly savings don't really amount to much,” he said.
“It might be worth talking about mortgage modification.”
In some cases, a mortgage modification, or making changes to your original home loan to make your payments more manageable, may be an option.
“If you're really, really struggling, and you say something catastrophic has happened in your life…instead of refinancing, it might be worth talking about a mortgage modification with your lender,” Channell said.
The broader housing market is certainly not in danger of collapsing, and most homeowners are “not teetering on the edge of foreclosure,” he said.
But if you're having financial difficulties, the lender may be willing to modify the terms of your mortgage, Channell said. Contact your lender and see if you qualify.
Remember, whether or not refinancing your mortgage makes sense will depend on factors like your income, how long you'll be in your home, and closing costs, Cohen said.
“There is no one general rule that applies to everyone in the country,” she said.
Talk to your lender or broker, or reach out to a financial advisor to determine what might be best for you, Channell said.
“They will be able to explain the details of your condition,” he said.
