Why You Shouldn’t Wait for the Upcoming Fed Rate Cut to Refinance

Many homeowners are eagerly waiting for the Federal Reserve’s expected rate cut this month, hoping it will lead to lower mortgage rates. However, refinancing now—rather than waiting—could be a smarter move. Here’s why.

The Market Has Already Priced in a Rate Cut

Mortgage rates don’t directly move in lockstep with the Fed’s rate decisions. Instead, they are largely driven by market expectations. Currently, markets are anticipating that the Fed will cut interest rates soon. As a result, mortgage rates have already adjusted downward in anticipation of this move. This means that if you’re waiting for the Fed’s announcement to see a significant drop in mortgage rates, you may be disappointed—because the market has already factored it in.

The Risk of Market Surprises

While the market expects a rate cut, there’s no guarantee the Federal Reserve will meet those expectations. If the Fed cuts rates less aggressively than expected or provides commentary suggesting future rate hikes or uncertainty about inflation, mortgage rates could actually rise. This counterintuitive scenario can occur because mortgage rates reflect long-term bond market trends, not just short-term changes in Fed policy. If the market feels the Fed’s policy isn’t as dovish (or supportive of lower rates) as hoped, bond yields—and mortgage rates—could spike upward.

Mortgage Rates Aren’t Tied to the Fed Funds Rate

It’s important to understand that the Fed’s rate cuts affect short-term interest rates, not directly on long-term mortgage rates. Mortgage rates are influenced by the 10-year Treasury yield, which moves based on broader economic forces and investor sentiment about inflation, growth, and monetary policy. In other words, even if the Fed lowers short-term rates, mortgage rates could increase due to external factors, like higher inflation expectations or changes in global markets.

What Is a Rate Renegotiation?

One advantage you may have when refinancing today is the ability to renegotiate your rate if interest rates fall after locking in. Many lenders allow one rate renegotiation if your loan is ready to close (also known as “clear to close”). For a fee, typically around 0.25% of the loan amount, you can lower your locked rate to the current market rate before finalizing the loan.

Example of Rate Renegotiation:

? You lock in a 30-year mortgage at 5.875% today on a $500,000 loan.

? The lender offers you the option to renegotiate if rates fall before closing.

? Let’s say rates drop to 5.375%.

? By paying a 0.25% fee (which amounts to $1,250 on a $500,000 loan), you can adjust your rate to 5.375%.

This allows you to secure the best of both worlds—locking in today’s rate with the flexibility to take advantage of falling rates should they occur.

What Would the Savings Look Like?

Let’s break down the difference in monthly payments if rates fall and you renegotiate:

? Loan Amount: $500,000

? Initial Rate: 5.875%

? Monthly Payment: $2,957.62

Now, if you renegotiate to 5.375%:

? Renegotiated Rate: 5.375%

? New Monthly Payment: $2,796.79

By renegotiating, your monthly payment would decrease by $160.83, which totals $1,929.96 in savings per year.

Even after accounting for the $1,250 renegotiation fee, you’d still save significantly over the life of the loan. In this scenario, renegotiating would save you over $57,498 in interest over 30 years.

The Current Rates Are Historically Favorable

Even without a Fed rate cut, mortgage rates are currently at attractive levels by historical standards. If you’re considering refinancing, locking in today’s rates provides a level of certainty. Waiting for a future rate cut introduces risk—if rates rise, you could end up refinancing at a higher rate than what’s available now. In a volatile market, trying to time the lowest possible rate can backfire, resulting in missed opportunities for savings.

The Cost of Delaying Your Refinance

For homeowners carrying high-interest debt or higher mortgage rates, every month you wait to refinance could be costing you money. For example, if you’re refinancing to consolidate credit card debt or a car loan, you may already be paying far higher interest rates on those debts than what’s available for your mortgage refinance. Each month of waiting translates to more interest paid on those debts—savings that could be locked in today.

Protect Yourself from Market Volatility

Given the uncertainty around the Fed’s actions and market reactions, locking in today’s rates allows you to hedge against future volatility. Refinancing now secures a fixed, predictable rate for the life of your loan, and even if rates drop after a Fed cut, you can always explore a rate renegotiation option with your lender. However, if rates rise, you’ll be glad you didn’t wait.

While it’s tempting to wait for an anticipated rate cut from the Federal Reserve, the reality is that mortgage rates have already priced in the expectation of lower rates. And if the Fed surprises the market or the economic outlook shifts, mortgage rates could move higher. By refinancing now and locking in a favorable rate, you can take advantage of current rates and leave yourself room for a renegotiation if rates fall further.

Message me today to talk strategy for your unique situation!