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“Marry the house, date the rate” seemed like a reasonable homebuying strategy when economists were predicting mortgage rates would drop in 2024 and beyond. But now, looking into 2025, it seems like higher rates are here to stay.
The economic research team at Realtor.com says mortgage rates will average 6.3% across 2025 and end the year at 6.2%. That’s better than the 6.7% average expected across 2024, but it’s still well above the 4% historical average recorded from 2013 to 2019, they say.
At the same time, there are homeowners who have been planning to refinance when rates drop. Some of them are now wondering what they should do.
According to industry professionals, answering this question is not simple but it all starts with one’s lender.
“First and foremost, your lender should be giving you updates on the market,” said Brian Carlucci, loan officer with Advisors Mortgage Group. “I’ve seen people do this once a quarter but at the bare minimum, it should be once a year. Just like planning to buy a house, planning to refinance shouldn’t be a game-day decision. It is something that is discussed and planned out well in advance.”
In addition to knowing where the market stands, it is important to know that this decision is based on a lot of moving parts.
“There are a bunch of moving parts. Remember, it is about the overall picture: the interest rate, the size of your loan, equity, income, and more,” said Bill Maier, sales manager at United Mortgage. “Don’t base it off of when your neighbor or friends did it. Each situation needs to be treated independently.”
There are two major reasons Brad Malkin, president of Noble Home Loans sees clients refinancing in today’s market.
Malkin said the first group purchased their home when interest rates were higher and want to take advantage of current rates. He explained that any drop in rates is enough to make the refinancing process worthwhile.
If the homeowner has a lower mortgage rate than current market rates, they may be trying to tackle other debts.
“It may make sense to refinance and put all balances owed together because even if your rate jumps up, it still may be the lowest monthly outflow,” said Malkin.
Another factor to consider is the length of time it will take to pay off the closing costs from refinancing.
“Generally, there is a five-year rule; that is how long it will take on average to pay off the closing costs to refinance before you really start to see the savings,” explained Jules Zaphire, a real estate professional at The Pantiga Group. “If you plan on moving before then, refinancing is most likely not worth it.”
Deric Zaphire, a mortgage loan originator with RFA Capital, said he typically advises his clients to think about their overall financial goals before refinancing, especially if it will take years to pay off the closing costs.
So when should homeowners begin the process if they do want to refinance?
One of the biggest tell signs that it may be time to start researching a refinance is, no surprise, the current interest rate. But how much of a drop should one wait for before making a move? There are mixed suggestions.
“I think a huge signifier is the rates in general – if they are dropping significantly and your rate is higher than what’s out there, then yes, it is time to start researching. It doesn’t necessarily mean it will actually be time,” said Deric Zaphire.
Carlucci said refinancing can be beneficial when rates are around 1% lower than what a homeowner is currently paying. Jules Zaphire advises people to wait until they are 2% lower.
“If you are looking online and rates are between half and a full percentage point less, it is time to start researching,” said Maier.
Maier has a warning for homeowners who may be holding out.
“Don’t wait to see the 2% or 3% rates that we saw during COVID,” explained Maier. “It’s not that those rates won’t ever happen again, but it is unlikely for the foreseeable future.”
Here are a few tips to keep in mind:
Communicate with your lender
“If you have any inkling that the market is shifting in a positive direction, then communicate with your lender,” said Carlucci. “The prime window for a solid refinance can be smaller than people realize and if it turns out not to be the right time, at least you have the information you need for next time.”
Use the same lender
“I will waive lender fees on a refinance for anyone that used me on the original loan,” said Carlucci. “Title fees still exist but using the same lender could save you a chunk of change with deals or discounts.”
“Most lenders have some type of rapid refinance that requires less documentation because they already have done business with you,” explained Dean Kelker, senior vice president with SingleSource Property Solutions. “Doing a refinance with a new lender is almost like taking out a new loan.”
Get comfortable with your current mortgage payment
Don’t fall into the mindset that you can date a rate. Kelker said it is extremely important to be comfortable with the initial payment because there are no guarantees that rates will drop.
Figure out how much you could save by refinancing
The biggest question for each homeowner is how much of a monthly savings is worth it. This answer can be vastly different for each individual. Have a target number in mind so you know if the closing costs are worth it.
“I’ve had clients be happy with an extra $100 per month while others want at least $500,” explained Deric Zaphire. “It all depends on your financial goals and current situation.”
Consider other options
Homeowners who have equity in their homes might want to tap that instead of refinancing. Consumers can use home equity loans to consolidate debt, for home improvements, or for other financial goals.
Rocket Mortgage has launched new 15- and 30-year home equity loan options. Mike Fawaz, executive vice president at Rocket Pro TPO, recently spoke to The Mortgage Note about this.
He said these options are a great fit for people who took advantage of the low mortgage rates available during the Covid pandemic.
“The demand is very high when it comes to this product because it puts you in a position as a consumer to tap into your equity without having to touch your favorable interest rate that you probably got three or four years ago,” Fawaz said.
