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Mortgage rates are down more than a half point since the end of last May, sparking a more than 62% increase for refinance applications year over year. Does that mean now is a good time to refinance your mortgage?
What causes mortgage rates to rise and fall?
The Federal Reserve certainly hasn’t helped move mortgage rates lower in the last few months.
The Fed uses shorter-term interest rates to influence bond markets and steer the economy. For example, when inflation is too high, the Fed increases the federal funds rate to make borrowing more expensive and ease demand. On the other hand, the Fed may cut its benchmark rate to make borrowing more affordable and stimulate economic activity.
The Fed lowered short-term interest rates three times in 2025. However, so far in 2026, it has been in a “wait and see” mode.
Nevertheless, mortgage rates don’t always respond directly to the Fed’s interest rate moves — or lack of them. Often, the 10-year Treasury yield, a proxy for mortgage rates, declines prior to a Fed announcement. Sometimes there is no bond market reaction to a Fed meeting at all. However, the week-to-week changes in the Treasury yield are a good indication of what is to come for mortgage rates in the short term.
It’s not a one-to-one interest rate relationship; there can be a 2% or more difference between Treasurys and mortgage rates. But the directional moves are often coordinated.
How low will mortgage rates go?
Most mortgage market observers expect home loan rates to remain in the low-6% range through 2027.
In its latest housing outlook, Fannie Mae expected mortgage rates to be near 6% through the end of 2026 and into 2027. The Mortgage Bankers Association predicted 6.3% through 2026, and 6.2% to 6.3% in 2027.
A 6% interest rate is generally good when you consider historical mortgage rates. The 50+ year average for mortgage rates is over 7.5%. Rates were in the 7% range way back in 1971 when Freddie Mac began keeping records.
When is the best time to refinance your house?
When deciding whether to refinance your mortgage, the question often is: How much do interest rates need to drop for refinancing to make sense financially?
In the past, the easy estimate was 2%. Then, as rates fell, it was 1%. We’ve seen mortgage lenders say that a half-point — or even a quarter-point — drop in interest rates can make refinancing worthwhile.
Every easy answer is mostly just noise. Like all rules of thumb, a quick solution is not often the correct answer. Any financial decision needs an answer derived from actual math.
Is now a good time to refinance?
Here’s the five-step process to making a good decision when it comes to refinancing your mortgage:
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Know your current interest rate, your monthly payment, and your credit score.
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Determine if you’ll refinance your loan balance or would prefer a cash-out refinance.
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Will you refinance for a loan term that equals or is shorter than the time remaining on your existing mortgage? (Preferred.) Or will you extend your debt? (Not preferred, but a worthwhile option in certain circumstances.)
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Get an estimate of your closing costs from a mortgage refinance lender (or preferably two or more).
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Determine how long it will take to recoup those new loan costs with your monthly savings on a lower interest rate. That’s your break-even point. Is it equal to or less than the time you plan on remaining in your current house? Good. Longer? Not good.
Now you have the answer to the question: Is it a good time to refinance your current mortgage?
This could be a better option than refinancing
About 80% of homeowners today have a mortgage with a rate of 6% or lower, according to Realtor.com. Over half have a rate below 4%. Rather than refinance, many of these owners tap their equity with a second mortgage, such as a home equity line of credit.
If you’ve been waiting for mortgage rates to provide an entry point for a refinance, a HELOC can be an alternative. Hang on to your low primary mortgage rate and unlock the value already accrued in your home. The line of credit allows you to access the cash you need, repay it, and repeat as needed.
Many HELOC lenders offer an introductory interest rate lower than the variable rate that kicks in later. Plus, if mortgage rates do go down, you can still jump into a refinance.
Is now a good time to refinance your mortgage? FAQs
What will the Fed’s rate cut pause do to mortgage rates?
The Fed remains concerned about a return to higher inflation due to higher oil prices resulting from the Middle East conflict. Inflation concerns can unnerve the bond market. That can cause mortgage rates to become more volatile. Keep your eyes on the daily mortgage refinance rates.
Is it a good idea to refinance a house right now?
It can be. Even if you’re on the margin for a mortgage rate improvement, there are many good reasons to refinance. For one thing, Americans are sitting on roughly $34 trillion of home equity, so many may choose a cash-out refinance — or a HELOC or home equity loan — to access that value for home improvements or other cash needs.
How much does it cost to refinance?
The cost of refinancing isn’t cheap. You’ll pay between 2% and 6% of the total loan amount in origination fees and closing costs. And if you extend your loan term when you refinance, you’ll pay way more interest over the life of the loan. Even no-closing-cost refinances have their pros and cons. Consider all of your options before jumping into a refi.