Mortgage Rates Have Been Steadily Dropping. Here’s How to Prepare for a Mortgage Refinance

Mortgage rates are steadily moving lower, and homeowners with higher-rate mortgages may finally have their first real shot at a meaningful refinance.

As of September 18th, 2025, the average 30-year fixed rate sits at 6.26%, according to Freddie Mac data sourced through the Federal Reserve Bank of St. Louis. That’s down from the 7.5%+ peak in late 2023, and close to the psychological 6% threshold many borrowers have been watching.

Many homeowners are already refinancing to take advantage of the recent interest rate drops, and it may become enticing to thousands more if rates continue to drop. 

How we source rates and rate trends

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Rate data in the charts and tables above comes from RateUpdate.com. The displayed rates come from multiple providers and represent market averages. Your mortgage rate will differ based on individual factors like your credit score as well as differing loan types and terms offered by lenders.

How to Know When It’s Time to Refinance

Refinancing to lower your mortgage rate and payment is all about weighing the upfront costs against the long-term savings:

• Upfront cost: You pay closing costs to refinance, just like when you originally purchased the home. These usually come to 2 – 5% of your principal balance.
• Long-Term Benefit: The refinance will ideally lower your mortgage payment. Over time, the savings from your monthly payments will outweigh the upfront costs. This is known as your break-even period.

Keep in mind that refinancing may result in higher finance charges over the life of the loan, meaning you could pay more lifetime interest if you refinance. This is especially true if you extend or reset your loan term.

How Much of a Rate Drop Do You Need?

There’s no universal number that guarantees a refinance makes sense, but many experts follow a rule of thumb: if you can lower your interest rate by at least 1 percentage point, it’s usually worth considering — especially if you plan to stay in the home long enough to recoup closing costs.

Homeowners with large loan amounts may see significant savings with just a 0.25% or 0.50% rate drop. 

Using the 1% threshold and September 18th’s average interest rate of 6.26%:

• Anyone who bought or refinanced when rates were 7.26% or higher could be a prime candidate for a refinance.
• That includes homeowners who locked in between late August and late November 2023, when rates peaked between 7.23% and nearly 8%.

Sourced from the Federal Reserve Bank of St. Louis.

Why a 1% Rate Drop Isn’t Always the Whole Story

The 1% rule-of-thumb can make for a good estimation, but refinancing math is personal. Here’s what you should actually consider:

Loan size

The bigger your mortgage, the more impactful a rate drop becomes. Here’s how much you could save each month by refinancing from 7.5% to 6.5%, compared to refinancing from 7.5% to 7%, based on your loan size:

Loan Balance	1% Rate Drop Monthly Savings (Approx.)	0.5% Rate Drop Monthly Savings (Approx.)
$200,000	$133	$67
$300,000	$199	$101
$400,000	$266	$134
$500,000	$332	$168

These estimates reflect monthly principal and interest savings only and assume a 30-year fixed-rate mortgage. Actual savings may vary based on your remaining loan term, taxes, and insurance.

Break-even point

Even if rates drop, refinancing isn’t free. That’s why calculating your break-even point—the number of months it takes for your monthly savings to cover your closing costs—is key to deciding whether a refinance is worth it.

What Is the Break-Even Point?

Your break-even point tells you how long you need to stay in the home for the refinance to “pay for itself.” After that point, the monthly savings are essentially profit. Check out our refinance break-even calculator to run your numbers.

Real-World Example

Let’s say you bought a $400,000 home in September 2023 with a 30-year fixed-rate mortgage at 7.25%.

• Original loan amount: $380,000 (after 5% down)
• Original interest rate: 7.25%
• New interest rate if you refinance: 6.25%
• Estimated refinance closing costs: $7,500 (approx. 3.5% of loan balance)
• Remaining loan balance: ~$372,000 (approx. 24 months into mortgage)

Monthly Payment Comparison:

Scenario	Principal & Interest (approx.)
Original @ 7.25%	$2,592
Refi @ 6.25%	$2,290
Monthly Savings	$302

$7,500 (closing costs) ÷ $302 (monthly savings) ≈ 24 months

If you plan to stay in the home for more than two years, this refinance is likely worth it. After the break-even point, you’ll save about $3,624 per year.

All figures are for example purposes only.

Timeline

If you’re planning to move within a year or two, you may not recoup the upfront costs. But if you’re staying put for 2+ years, the long-term savings can add up.

When Should You Start Shopping Lenders?

Timing is everything when you’re watching rates and preparing to refinance. If you’re waiting for mortgage rates to hit a specific target, you don’t want to start from zero the moment they do. 

The best time to start shopping lenders is before rates reach your ideal level—so you’re ready to lock quickly when the time comes.

Start Shopping Before You Hit Your Target

If you wait until rates drop to your goal, you may already be too late. Refinances often require income documentation, credit checks, a home appraisal, and underwriting. By starting early, you can request a shorter lock – 30 days instead of 45 or 60 – which often qualifies you for a better rate or lower fees.

How Many Lenders Should You Compare?

Experts generally recommend comparing offers from at least three lenders, ideally more. Here’s why:

• Rates vary from lender to lender—sometimes by 0.25% or more.
• Closing costs differ based on lender fees and third-party costs.
• Loan products and lock options vary (e.g. float-down, extended lock periods, low- or no-cost refis).
• Service matters—especially if you want to move fast when rates drop.

Make sure you’re comparing not just interest rates, but the APR, which includes lender fees, and total estimated closing costs.

How Far Along Should Your Application Be?

If you’re aiming to refinance when rates hit a specific target, your loan file should already be in motion. At minimum, you should have submitted your initial application and be fully pre-approved—meaning your lender has verified your income, credit, and assets.

This allows you to lock quickly when the rate hits your number, without delays caused by documentation or underwriting backlogs. Some lenders may even let you lock as soon as you’re pre-approved; others require a completed file. Either way, the earlier you start, the more flexibility you’ll have when the opportunity arises.

Pro Tip: Ask Your Lender About Extended Locks and Rate Watch Programs

Some lenders allow you to secure a rate before your file is complete or let you lock for an extended period while you finalize your paperwork. Others offer rate “watch” tools or proactive alerts when rates hit your desired range.

When Should You Lock Your Rate?

If you’re refinancing during a rate dip—especially one driven by market volatility or Fed speculation—timing your rate lock becomes critical.

Locking Secures Your Savings

When you lock your interest rate, your lender guarantees that rate for a set period (often 30–60 days). This protects you from rate increases while your loan is being processed.

• If rates rise after you lock, you’re protected.
• If rates fall further after you lock, that’s where float-down options may come in.

What Is a Float-Down Option?

Some lenders offer float-down options, which allow you to “float down” to a lower rate if rates drop significantly during your lock period—usually once, and under specific conditions.

• Typically triggered if rates drop by 0.25% or more.
• May involve a fee or a slightly higher original rate to gain float-down flexibility.
• Terms vary, so ask your lender upfront if this option is available and how it works.

So, When Should You Lock?

• Lock if you’ve reached your target rate, your break-even math works, and you’re confident in moving forward.
• Wait (cautiously) if you’re early in the process, rates are trending downward, and your lender offers float-down protection or extended locks.
• Monitor daily movement. Even small fluctuations can have a big impact—especially on larger loan amounts.

Pro tip: You can also start an application, float while rates are falling, and choose to lock once your savings goal is met—but talk to your lender early about how they manage this process.

Mortgage Rates Forecast: What’s Next?

Mortgage rates are showing signs of easing after recent shifts in Fed policy, but don’t expect a sharp drop overnight. Here’s what is happening now and what experts anticipate for the rest of 2025:

• Fed Rate Cut in Mid-September. The Federal Reserve lowered its benchmark rate by 25 basis points to a range of 4.00-4.25%. It’s the first cut in nine months, with Fed officials signaling there may be two more rate reductions before year’s end.
• Mortgage Rates Responding, But Slowly. According to Freddie Mac, the average 30-year fixed mortgage rate dropped to about 6.26% from 6.35%, the lowest in nearly a year. Meanwhile, mortgage demand—especially for refinancing—is increasing.
• Lingering Frictions & Key Drivers: Even with the Fed’s move, mortgage rates may not fall dramatically because:
  • The 10-year Treasury yield, long-term inflation expectations, and mortgage-backed securities (MBS) spreads still play large roles.
  • Inflation is still above target, and labor market weakness is present but not yet extreme. These mixed pressures mean the Fed is expected to proceed cautiously.
• What Analysts Are Forecasting
  • Most believe mortgage rates will remain in the low- to mid-6% range for the rest of 2025. Falling significantly below 6% will likely require more aggressive rate cuts or policy shifts.
  • Bank of America projects the average 30-year fixed rate will end 2025 around 6.25%.
  • Nomura and others have added forecasts for cuts in October and December.
    
• Risks and Wildcards: Several factors could push rates either up or down:
  • If inflation unexpectedly rises, or economic growth remains strong, long yields could move up, pushing mortgage rates higher.
  • If the labor market weakens more sharply, or inflation comes down faster, the Fed and financial markets could anticipate more aggressive cuts, which might help mortgage rates fall further.
  • Policy tools like changes in how the Fed handles MBS (mortgage-backed securities) or spread compression between bond yields and mortgage rates also matter.

Who Might Benefit If Rates Drop to 6.25% or Even 6.0%?

If rates continue to fall, more homeowners may find themselves in the money for a refinance.

At 6.25%

• Homeowners who bought between August and late November 2023 (when rates were ~7.1–7.3%) may see a 0.75–1% drop

At 6.0%:

• Nearly anyone who bought in the second half of 2023 or early 2024 could benefit

Final Thoughts: Is It Time to Refi?

If rates drop further, the savings only grow. But timing the bottom is tough. Instead of trying to guess where rates go next, start by asking:

• What’s your current rate?
• What’s your loan balance?
• How long do you plan to stay in your home?
• What are your refinance goals — lower payment, shorter term, drop mortgage insurance?

If you can save money, hit your goals, and break even in a reasonable timeframe, now might be the time to start shopping.

Ready to explore your refinance options? Check your rate and get a personalized estimate with Refi.com today.