Refinancing won’t pay off for most homeowners planning to move soon, economist says

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

The key to refinancing, he said, is knowing whether the move passes a rule called the “break-even point,” which looks at whether the upfront costs are outweighed by the savings from a lower rate.

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

While the Federal Reserve has cut interest rates for the third time in a row, this does not necessarily mean that 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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Although policymakers have indicated there may be only one rate cut in the new year with interest rates approaching a neutral level, economists expect mortgage interest rates to decline slightly, hovering around 6.3% next year.

Although this decline is not massive, only down from its average of 6.6% in 2025, it does lead to questions about refinancing, Krimmel said.

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

Newly built single-family homes for sale in Encinitas, California, on July 31, 2019. (Reuters/Mike Blake)

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

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Today, most homeowners’ mortgage interest rates are well below current market rates, so refinancing would cost them money. This has become commonly known as the “lock-in” effect. For example, today, only people with a mortgage rate of 6.65% or higher are able to reach the break-even point where refinancing may pay off. Currently, more than 80% of homeowners have mortgage interest rates below 6%, which means that only a small group of borrowers will benefit from refinancing any time soon.

A sign is placed in front of a home for sale on August 7, 2024 in San Rafael, California. According to a report by Zillow, 30-year fixed mortgage interest rates fell 31 basis points to 6.06%, while the 30-year fixed refinance rate fell 1.15% to 1.15%. (Justin Sullivan/Getty Images)

So, if someone is planning to move soon, Krimmel said refinancing “probably” won’t be worth it.

The people who will benefit the most are those who bought homes recently — within the past two or three years — when interest rates were between 7% and 8%. Even a small decline in market rates could increase their wealth by more than 1%, making refinancing attractive. But these borrowers also tend to have larger loan amounts and plan to stay in their homes for at least five more years, so refinancing savings will be even more important.

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Meanwhile, any small drop in interest rates is “absolutely irrelevant” to homeowners who are “out of money” or locked into mortgages as low as 3% to 4%.

Homeowners also need to remember that it’s not just about average mortgage interest rates reported but also about the rate they can secure. Credit, down payments and shopping are extremely important, and can be more important than fluctuations in Fed policy, according to Krimmel.