How to get ready to refinance if the Fed cuts interest rates

Federal Reserve Chair Jerome Powell hinted at possible interest rate cuts in the near future during a speech on Friday at the central bank’s annual event in Jackson Hole, Wyoming. 

“The shifting balance of risks may warrant adjusting our policy stance,” Powell said.

That may bode well for homeowners who have been hoping to refinance mortgages with high rates, experts say.

The central bank’s benchmark rate influences many borrowing costs for Americans. Mortgage rates closely track the 10-year Treasury yields, which are sensitive to changes in the economy, including monetary policy decisions.

If the Fed does cut interest rates in September, “there could be some clear implications for mortgage interest rates,” said Jessica Lautz, deputy chief economist at the National Association of Realtors. 

“That would certainly be good news,” she said. 

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Lower mortgage rates often result in lower borrowing costs for home loans. For homebuyers who have struck out in the housing market due to a combination of high home prices and high interest rates, lower borrowing costs could help them secure better loan terms.

Homeowners, meanwhile, “can refinance” to benefit from lower rates, Lautz said, or “they can also make a move” by becoming home sellers.

Mortgage rates have generally declined in recent months despite some volatility. The average 30-year fixed rate mortgage was 6.58% for the week ended on Thursday, Aug. 21, flat from the week prior, according to Freddie Mac.

Overall, experts say it is important for homeowners with higher-rate mortgages to start paying attention to interest rate movements, and preparing for opportunities to refinance.

“Getting the preparation done beforehand will allow you to move quickly,” said Keith Gumbinger, vice president of mortgage website HSH.

Before you refinance, you want to make sure mortgage rates have “dropped sufficiently” for you to see real savings, Melissa Cohn, regional vice president of William Raveis Mortgage, recently told CNBC.

There are different rules of thumb used to determine when rates have declined enough. According to Redfin’s Zhao, homeowners should consider a refi if rates are at least 50 basis points lower than their current rate.

Rates can change fast, so it’s smart to know that target number and start preparing ahead of time, experts say.

“If you’re looking to refinance, especially in this type of interest rate climate, you need to be opportunistic, which means you probably need to move quickly,” said Gumbinger. 

Here are five key steps to take:

First, pull your credit reports from all three bureaus — Equifax, Experian and TransUnion — to understand how information on them is influencing your credit score. You can request them from the major credit bureaus for free via annualcreditreport.com.

Knowing this detail will help you get more accurate rate quotes from lenders, according to HSH. Unlike many other kinds of loans, with mortgages, lenders tend to look at scores from all three bureaus.

If you notice any errors that could be inadvertently hurting your score, the sooner you fix them, the better, experts say. Reach out to the creditor as well as the credit reporting bureau, and explain the situation, said Gumbinger.

However, it may take a bit of time to get the necessary parties involved and get the error fixed, he said. 

You want to protect your credit score as much as possible. Generally, the higher your credit score, the better terms and interest rates you qualify for.

If you plan to refinance in the near future, avoid doing things that could hurt your score, such as applying for new credit cards or other lines of credit, or making sudden, big purchases that you can’t pay off quickly, and avoid making late payments.

After checking your credit history, estimate how much equity you have in your home. If you have at least 20% equity in your home, you will get better loan terms from lenders, according to Bankrate.

If you believe you’ll benefit from a refi soon, HSH recommends gathering the following documents:

• Proof of homeowners insurance
• Proof of income and assets
• The latest copy of your existing mortgage statement
• A copy of your property’s deed to show legal ownership
• The latest property tax statement
• The names and addresses of your employers for the past two years

You can also start putting aside funds to cover upfront costs associated with a refi, including an appraisal and credit reports. An appraisal fee can cost roughly $300 to $500, while a credit check fee is typically less than $30, according to Bankrate.

There’s an advantage to beginning to research different lenders and what they offer before you actually want to refinance because interest rates move pretty quickly, said Gumbinger.

Rather than starting from scratch when you’re ready to refi, gathering contact information and learning about different loans, rates and terms ahead of time can be helpful, experts say.

“You don’t have to actually contact the lenders, but you can do some advance research to speed things along,” said Gumbinger.

Once you know you’re “actually ready to pull the trigger,” then you can seriously shop around, said Cohn.

Start with your existing lender, as they have a record history with you and may be able to offer a streamlined process, Gumbinger said. Once you shop around, you’ll want to pick the lender that offers you the best terms, such as the lowest interest rate, experts say. 

You could even start getting on their contact lists and ask them to reach out to you once it’s good for you to refinance, said Zhao. 

If you do refinance and interest rates happen to decline further, you can always repeat the process.

Just make sure “there’s a big enough gap to make it worthwhile,” Gumbinger said.