After the recent drop in interest rates by nearly 0.5%, many of our clients who purchased homes in the last couple of years are wondering if it’s time to refinance their higher-interest mortgage rates. Unfortunately, there’s no crystal ball to provide an exact answer, but there are some reliable indicators that can help guide your decision.
Understanding CME FedWatch: A Reliable Resource
One of the most dependable tools for predicting interest rate movements is the CME Group FedWatch Tool. This tool uses data from the federal funds futures market to estimate the probability of upcoming changes to the Federal Reserve’s target interest rate. It’s widely respected for its accuracy because it reflects real-time market sentiment about future rate changes.
As of August 13, the CME FedWatch Tool shows a 45.5% probability of a 0.25% rate decrease and a 54.5% probability of a 50 basis point reduction at the upcoming September meeting. Looking further ahead, the tool indicates an 82% chance of at least a 1-point reduction by December. By the April 2025 meeting, there’s a 93% probability that the target rate will be at least 150 basis points lower than it is now.
How Fed Rates Impact Mortgage Rates
It’s important to note that the Federal Reserve’s target interest rate doesn’t directly dictate mortgage rates. The Fed’s rate is a short-term rate that influences the overall economy. When the Fed lowers its rate, it signals a desire to stimulate a weaker economy. In such scenarios, investors typically seek safe, long-term assets, causing treasury yields to decrease. Mortgage rates, which are typically based on the 10-year treasury yield plus a risk premium, often follow suit.
This connection is why the CME FedWatch Tool is still a valuable resource for forecasting mortgage rates. As the Fed’s target rate drops, it’s likely that mortgage rates will decrease as well, making refinancing a more attractive option in the near future.
Is It the Right Time to Refinance?
Given these projections, it appears that better mortgage rates will likely be available in the coming months. However, refinancing your mortgage comes with costs—around $4,000 on average to close a typical refinance in the Colorado Springs area. For most homeowners, it would make sense to wait until rates drop to or below 6% to refinance, ensuring the savings outweigh the closing costs.
To get a more personalized picture, we recommend using our Mortgage Calculator. Input your home price, down payment, and loan term to estimate your monthly payment. While this estimate won’t match your current payment exactly, you can adjust the interest rate to a lower anticipated rate (such as 6%) to see how it would affect your monthly payment. This will help you calculate how many months it would take to recoup the refinancing costs.
Don’t Wait Too Long
While it might be tempting to hold out for rock-bottom rates, it’s important to remember that interest rates fluctuate daily. Waiting too long could mean overpaying for your mortgage in the short term, hoping for a better deal that may not materialize. Instead, we recommend watching for the big rate decreases and deciding whether to act or not at that time.
Final Thoughts
Remember, this article is for educational purposes only and shouldn’t replace individualized financial advice. We strongly recommend consulting with a mortgage lender or real estate agent to get advice tailored to your specific situation. And of course, we're always happy to help. If you're looking for a deeper dive into mortgage rates and their drivers, this article from Investopedia is a great place to start.
