Is This a Refinance Boom or Bust? What the Mortgage Market Tells Us

Mortgage interest rates are beginning to drop toward 6%, making refinancing a sensible option for more homeowners. 

In fact, a recent report by ICE Mortgage Monitor found that when rates dipped below 6.5% at the beginning of September, the number of highly qualified refinance candidates more than doubled from just a few weeks earlier. 

According to the Mortgage Bankers Association, refinance demand for the week ending Sept. 20 was 175% higher than the same week one year ago.

But while lower rates will boost activity, experts say we won't see another pandemic-era refinance boom.

"At the end of the day, it's more of a dripping faucet than a firehouse," said Vickey Barron, a broker at Compass.

Experts anticipate that refinance applications will pick up gradually as mortgage rates keep their downward trend. A recent survey by CNET Money found that while only 4% of US adults would consider purchasing a home or refinancing with a 6% mortgage rate, more than four times as many would consider it with a 5% rate.

Matt Vernon, head of consumer lending at Bank of America, says he's already seen an increase in refinance activity since the Federal Reserve's Sept. 18 rate cut. Still, Vernon doesn't anticipate a major refinancing wave in the next period, but rather "a slow and methodical increase."

💡 Read more about CNET's homebuying survey: Mortgage Rates Are Falling, but Won't Get Low Enough for Most Americans

When will refinancing pick up again?

Refinancing, which involves replacing your current home loan with a new one, makes financial sense if you can decrease your mortgage rate by at least 1%, according to Vernon. When you refinance your mortgage, you're on the hook to pay thousands of dollars in closing costs, so it's not worth the expense for only a minor reduction in your interest rate or small savings in your monthly payment.

Currently, around 76% of mortgage holders have rates below 5%, which means they'd have to see rates drop below 4% to consider refinancing. CNET Money's survey results confirmed that half of US adults would consider homebuying or refinancing with rates of 4%. 

The Fed projects at least another 0.5% reduction in interest rates before the end of the year, and Vernon predicts the Fed will cut interest rates by at least one additional percentage point in 2025. While the central bank doesn't directly set mortgage rates, it sets borrowing costs for shorter-term loans, which impacts the rates that banks and lenders offer customers for mortgage loans. 

Many homeowners have low interest rates today because they either took out a mortgage or refinanced their mortgage during the low-rate boom in 2020 and 2021, after the Fed reduced its benchmark rate to near zero during the pandemic. 

In the first half of 2021 alone, mortgage refinance volume added up to $1.6 trillion, according to Freddie Mac. By comparison, in the first half of 2024, mortgage refinance volume was $147 billion, the lowest level since 1995.

Which homeowners are refinancing right now? 

While the majority of homeowners wouldn't see a financial advantage to refinancing right now, Vernon says those replacing their existing mortgages likely purchased a home in the last two years with rates above 7.5%. For them, even a 6.5% rate today could yield considerable savings.

And some homeowners are refinancing for other reasons, like to change their loan term or cash out home equity.

Maja Sly, a real estate broker with the Sly Team at Keller Williams, says most refinances originate from people going through big life changes. If a couple is getting divorced, or if a family is trying to pay off debt or preparing for a new life phase like retirement, refinancing could be a viable option. 

Read more: 3 Reasons Homeowners Are Refinancing at Higher Rates 

What impact does refi activity have on the housing market overall?

An increase in refinancing isn't necessarily good news for the housing market. According to Vernon and Sly, homeowners who are refinancing are probably planning to stay in their home, and won't be selling. That could just exacerbate the limited supply of exciting homes for sale. 

Low inventory is a major challenge for buyers in the current market, and it can also hurt affordability: Sellers still hold much of the power, and can charge higher prices when there's less choice for buyers.

That said, there could be benefits in the long term. Homeowners who refinance now and start saving money could be more likely to afford a move down the line, which would free up inventory for new buyers, Vernon says.

Read more: Cheaper Mortgages Are Coming, but How Soon After Fed Rate Cut?

Will there be another refinancing boom?

In a word: No. At least not like before.  

Mortgage refinance rates aren't expected to drop to rock-bottom levels, so the wave will be notable but modest. While "we're going to continue to see this gradual increase," Vernon says it won't be anything like the boom of 2021.

Although rates are moving in the right direction, homeowners shouldn't give into the frenzy around the Fed's rate cut if refinancing still doesn't make financial sense for them. 

Consider whether refinancing works for your budget and specific living situation. If you're going to move soon, for example, it's probably not worth it. Think long term and ensure the rates are low enough to make a real difference for you.