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If you’ve been paying any attention to the financial news, you know that the Federal Reserve Board chose to lower the federal funds rate in September. Although this doesn’t have a direct impact on mortgage rates, it does often nudge individual banks into lowering them. And because of this, mortgage rates tend to go down and people start to think about refinancing their mortgages.

So, when should you start your mortgage refinance process, now that it looks as if rates may be on the downhill slide? It’s a simple question with a really difficult answer.

When you bought your house matters

Although I’d like to just say you should probably wait until December or January for the best rates, it’s not that easy. When you bought your house really does matter a lot.

Obviously, no one with a sub-5% rate is going to consider refinancing since they’re unlikely to find a lower rate right now. But if you bought in November 2023, for example, you could have a rate of around 8%, as opposed to if you bought in February of 2023, when your rate might have been just above 6%.

With the average 30-year fixed rate mortgage sitting at 6.32% for the week of Oct. 10, 2024, one of those makes sense strictly based on rate and the other really does not. However, if you’re looking for a cash-out refinance, reaching out to one of these refinance lenders may still be the right move. I have been considering my own cash-out refi for a while in order to do some big projects around the house.

How to know it’s time to refinance

Timing is everything in refinancing. If your refinance won’t either cut your payment down significantly or help you reach a bigger goal like a shiny new bathroom, you need to wait until 2025 to even consider talking to a lender.

According to the CME Group’s FedWatch tool, your best bet at bottom-scraping rates is probably going to come around the June 2025 meeting of the Fed, when the federal funds rate is forecasted to drop to about 3.75% from today’s 5.13%.

Again, you can’t assume a direct relationship between 30-fixed rate mortgage rates and the federal funds rate, but at the moment, the spread (the difference between them) is about 1.20%, depending on who you ask. So, if that spread holds (it may not), and the federal funds rate goes down to 3.75%, you’d be looking at a mortgage refinance rate of 5% or thereabouts.

A 5% mortgage rate is pretty respectable, and going from 6.25% to 5% is a remarkable jump. Let’s look at how much that can save you in monthly payments.

Let’s assume a few things: You bought your house in April 2023, when rates were around 6.25%. Your median-priced home cost about $415,000, and your 5% down payment was $20,750. That means you’d have financed $394,250, and your principal and interest payment would be $2,427. As of Jan. 1, 2025, you’d still owe $385,971.

I’m also going to show you the break-even point, based on refinance closing costs of 5%.

So, if you do this fairly simple calculation, and you know when you think you’ll move, you can decide if it’s a good time to refinance or if you should wait for a slightly lower rate. Because, let’s face it, you have to be in a particular phase in your life to be absolutely certain you’ll be in your home for another 14 years, but a lot of people could safely gamble that they may stay another four or five years.

Start your mortgage refinance process when this happens

Although we don’t know for sure when mortgage rates will drop or bottom out, we can say a few things about them for certain: They’re likely to get much lower in 2025, and if you can shave a full percentage point off of a relatively new mortgage, it will save you a lot of money in interest payments, even if you only stay in the house for a few more years.

Start your refinance process when average interest rates are a half to a full percentage point below your current interest rate. Your mortgage lender can tell you exactly where you are at any given time, and wait to lock your rate accordingly (to a point). Waiting for a lower than 5% interest rate may leave you waiting a long time, and wasting a lot of money on interest in the meantime.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Kristi Waterworth has no position in any of the stocks mentioned. The Motley Fool recommends CME Group. The Motley Fool has a disclosure policy.