Personal Finance
How to know if you should refinance your mortgage or buy a house
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The Federal Reserve is poised to make the first interest rate cut in years this fall, which can influence mortgage rates to go down.
Even small cuts in rates could make a meaningful difference in what a homebuyer will pay. To that point, people in the market to buy a home have been eagerly waiting for the central bank to cut rates.
The Fed is meeting this week, but experts say it seems more likely the first rate cut will come in September. That would be the first rate cut since 2020 at the onset of the Covid-19 pandemic.
While there is a less than 6% chance of a rate cut in the upcoming Federal Open Market Committee meeting, according to the CME’s FedWatch measure of futures market pricing, there is a much greater likelihood of quarter-point reductions in September, November and December.
That along with further cuts in 2025 would bring the the Fed’s benchmark fed funds rate to below 4% by the end of next year, according to some experts.
While mortgage rates are fixed and mostly tied to Treasury yields and the economy, they are partly influenced by the Fed’s policy. Home loan rates have already started to come down, in part induced by Home loan rates have already started to come down, in part induced by the Fed putting the brakes on rate increases.
Here’s what homeowners and buyers need to know.
Rate cuts are already priced into the market
The first rate cut is almost entirely priced into financial markets already, especially bond markets, said Chen Zhao, the economic research lead at Redfin, an online real estate brokerage firm. In other words, mortgage rates aren’t going to change much once the Fed actually begins to cut back, she said.
“A lot of these rate cuts are already priced in,” she said.
The 30-year fixed rate mortgage declined to 6.78% on July 25, down from 7.22% on May 2, according to Freddie Mac data via the Fed.
Refinance now or later?
“Refinancings are starting to tick up, it’s not a huge wave yet, but they are starting to pick up a little bit as rates start coming down,” Zhao said.
Refinance activity on existing home loans was up 15% from the previous week, reaching the highest level since August 2022, according to the Mortgage Bankers Association. It was 37% higher than a year ago, MBA found.
Whether homeowners should refinance depends in part on their existing rate, said Selma Hepp, chief economist at CoreLogic.
“There are people that originated when mortgages peaked at 8% in the fall of last year,” Hepp said. For those buyers, “there is some opportunity there.”
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To be “in the money,” or when it makes sense to refinance, homeowners need to see a notable drop in mortgage rates in order to benefit, experts say. The prevailing rate should be at least 50 basis points below your current rate. A basis point is one-hundredth of a percentage point.
While that can be a good strategy, it’s not a “hard and fast rule,” said Jacob Channel, senior economist at LendingTree.
Timing the refinance of your home will depend on factors like your monthly mortgage payment and if you can pay closing costs, he said: “There’s a lot of variability.” (When you refinance a mortgage, you are likely to incur closing costs, as well as an appraisal and title insurance; and the total price tag will depend on your area.)
“The saving has to outweigh your upfront costs,” Zhao explained.
Even if your existing mortgage has a high rate, you might want to consider waiting until the central bank is further along in its cuts, with the expectation that rates are to steadily decline throughout the year and into 2025, Zhao said.
If you are thinking about it, reach out to lenders and see if refinancing now or in the near future makes the most sense for you, Channel said.
Buy now or later?
While lower rates can come as a relief for cost-constrained homebuyers, the real effects of lower borrowing costs are still up in the air, according to Zhao.
For instance: If borrowing costs for home loans come down, there’s a chance more buyers will jump in the market. And if demand outpaces supply, prices might go up even more, she said. It can “offset the relief you get from mortgage rates.”
But what exactly will happen in the housing market “is up in the air” depending on how much mortgage rates decline in the latter half of the year and the level of supply, Channel said.
“Timing the market is basically impossible,” Channel said. “If you’re always waiting for perfect market conditions, you’re going to be waiting forever. Buy now only if it’s a good idea for you.”
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President-elect Donald Trump has been vocal about potentially raising tariffs on imported goods, which experts say could bump up car prices.
Trump has talked about implementing an additional 10% tariff on Chinese imported goods, as well as adding tariffs of 25% on all products from Mexico and Canada. On Friday, Trump told the European Union it must reduce its trade gap with the U.S. by purchasing oil and gas, or it could face tariffs as well.
Tariffs are taxes on imported goods, paid by U.S. companies that import those goods.
Tariffs have the potential to disproportionately affect auto prices because materials used to assemble a vehicle come from different parts of the world. Some components even cross U.S. borders multiple times before they even get to the factory, according to Ivan Drury, director of insights at Edmunds.
“There’s no such thing as a 100% American vehicle,” said Drury. “There’s so much complexity, even though it’s a seemingly straightforward thing.”
Component tariffs could add $600 to $2,500 per vehicle on parts from Mexico, Canada and China, according to estimates in a Wells Fargo analyst note. Prices on vehicles assembled in Mexico and Canada — which account for about 23% of vehicles sold in the U.S. — could rise $1,750 to $10,000.
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If tariffs are enacted, the sticker price drivers pay at the dealership will eventually go up, experts say. But carmakers and sellers may have to bear some of the costs, too.
“The cost will spread across all stakeholders: automakers, dealers and consumers,” said Erin Keating, executive analyst at Cox Automotive. “No one company is going to dump all of that expense directly on their consumers.”
Here’s what to know.
Why cars may incur more tariffs than other goods
The automotive sector’s supply chain is unique because some pieces move back and forth across international borders while the part is built and assembled, experts say.
“People don’t really know where their vehicle is built and how it’s assembled from parts across the entire globe,” Drury said.
Take a steering wheel, for example. Electronic sensors or other parts that go into the steering wheel come to the United States for assembly from countries like Germany, Drury said. The steering wheel is then sent to Mexico for stitching, only for it to come back to the U.S. to be installed in the vehicle.
Vehicles could have “incrementally more tariffs applied” compared with other products, given the supply chain, said Keating.
If tariffs add to the manufacturing cost, automakers can’t risk passing on the entire tab to the shopper, experts say.
Carmakers and dealers may have to “bear some of the burden,” Drury said. “If you look at how expensive vehicles could get with those tariffs, there’s no way they’re going to be able to move as many [cars].”
There is, however, a silver lining — a lot of cars that will be on the lots in early 2025 have already been assembled or are currently being made, further adding to next year’s available supply, Keating said.
What car shoppers can expect in 2025
Car shoppers in 2025 are unlikely to see prices that factor in new tariffs, experts say. Baseline prices will be about the same, and dealers are likely to offer more incentives to pull in buyers next year.
The average transaction price for new cars is expected to hover between $47,000 and $48,000, according to Keating. As of November, the average price was $48,724, 1.5% higher from a year before, per Kelley Blue Book data.
While the average price is higher than pre-pandemic levels, “the good news is it’s relatively stable. We’re not vacillating all over the place,” Keating said.
As of December, average auto loan rates for new cars are at 9.01% while borrowing costs for used vehicles are at 13.76%, per Cox Automotive. The average rates for both types of loans are down about a full percentage point from a 24-year high earlier this year.
“We expect that consumers may see even lower rates by spring, which would create the most normal and favorable buying environment since 2019,” Jonathan Smoke, chief economist at Cox Automotive, wrote in the report.
For now, experts are optimistic for the auto market next year as inventory and deal opportunities grow.
“Tariffs or no tariffs, there will be more incentives,” Drury said.
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