Refinancing won’t be profitable for most homeowners planning to move soon, economist says

Refinancing may seem tempting as interest rates drop. But according to Realtor.com senior economist Jake Krimmel, there’s a common misconception that lower rates automatically make refinancing cheaper.

Krimmel cautioned that for many homeowners, this might not make financial sense, especially for those who plan to move soon.

Refinancing is considered a smart move if it meets a rule called the “break-even point,” which determines whether upfront costs are offset by the savings from a lower rate. In today’s market, many owners would not pass this test.

“The amount of the loan, the remaining term and, most importantly, how long the borrower plans to stay in their home are all important,” Krimmel said, adding that “typically, closing costs are divided by monthly savings.”

While the Federal Reserve If we cut interest rates for the third time in a row, that doesn’t necessarily mean mortgage rates will go down. Rates are not directly affected by the Fed’s interest rate decision, but closely track the 10-year Treasury yield.

HOMEOWNER’S INSURANCE COSTS COULD INCREASE OVER THE NEXT 2 YEARS

Although policymakers have indicated there may only be one rate cut in the new year, as rates move closer to a neutral level, economists expect mortgage rates to fall slightly, hovering around 6.3% next year.

While that drop isn’t massive, just down from its 2025 average of 6.6%, it raises questions about refinancing, Krimmel said.

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Refinancing isn’t free: Homeowners still have to pay the closing costs of the new loan, so it’s important that the savings from lower monthly payments over time exceed those costs, Krimmel said.

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

MORE THAN HALF OF US HOUSES LOSING VALUE OVER THE PAST YEAR

Today, most homeowners have mortgage rates well below current market rates, so refinancing would cause them to lose money. This is commonly called the “lock-in” effect. For example, today only people with a mortgage rate of 6.65% or higher would reach that break-even point where refinancing could be profitable. Currently, more than 80% of homeowners have mortgage rates below 6%, meaning only a small group of borrowers would benefit from refinancing in the near future.

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

The people who would benefit the most are those who bought a home recently – within the last two or three years – when rates were between 7% and 8%. Even a slight drop in market rates could put them more than 1% “in the money,” making refinancing attractive. But these borrowers also tend to have large loans and plan to stay in their homes for at least five more years. refinancing savings would have more importance.

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Meanwhile, any slight drop in rates is “irrelevant” for homeowners who are “cash strapped” or stuck on low 3-4% mortgages.

Homeowners should also remember that it’s not just the average reported mortgage rates, but also the rate they can get. Credit, down payments and purchases are extremely important and may matter more than fluctuations in Fed policy, according to Krimmel.