The Fed may soon make its first rate cut in years, but it might not be the right time to refinance your mortgage.

• After the Federal Reserve's first interest rate cut in years, homeowners can expect little change in their mortgage rates.
• Redfin's economic research lead, Chen Zhao, stated that "a lot of these rate cuts are already priced in" in a recent interview with CNBC.
• Experts suggest that it's time to refinance your mortgage when you can save money on interest rates or payments.

On Wednesday, the Federal Reserve is set to make its first interest rate reduction in a while. However, homeowners should not expect this move to be an immediate chance to refinance their mortgage.

Redfin's economic research lead, Chen Zhao, stated that "a lot of these rate cuts are already priced in" in a recent interview with CNBC.

Mortgage rates are influenced by the Fed's policy, Treasury yields, and the economy. Home loan rates have recently decreased, partly due to positive economic data and the possibility of the Fed reducing rates.

The average 30-year fixed rate mortgage in the U.S. was 6.20% on Thursday, Sept. 12, according to Freddie Mac data via the Fed. This is a decrease from the peak of 7.22% on May 2, this year.

The Federal Reserve's first rate cut is on the horizon, but don't expect immediate relief. Mortgage rates are falling, which is improving home buying conditions.

According to Jeff Ostrowski, a housing expert at Bankrate.com, it can be challenging to accurately time a mortgage refinance solely based on mortgage rate activity.

According to Ostrowski, determining mortgage rates' fluctuations on a weekly or monthly basis is nearly impossible.

Experts suggest that homeowners can determine the best time for a refinance by considering the potential rate cuts before the end of the year.

Experts suggest considering refinancing your mortgage when certain conditions are met.

'This is going to be a much smaller wave'

During the week ending Sept. 6, the percentage of refinance activity among total applications rose to 46.7%, an increase from 46.4% the previous week, as reported by the Mortgage Bankers Association.

Although there has been a rise in refinances due to lower mortgage rates, compared to the significant refinance surge in 2020 and 2021, this wave of refinances will be much smaller, according to Ostrowski.

Most homeowners have a mortgage rate below 5%, said Channel.

A refinance will mostly benefit a limited number of individuals who purchased homes when interest rates were at 8%, according to Ostrowski.

The decision to refinance a mortgage depends on various factors, including the borrower's current financial situation and repayment schedule, according to experts.

How to know when it's time to refinance

Before refinancing, consider the current market rates and consult with lenders to determine if it's the best time to do so.

You are the only one who can determine if refinancing is beneficial based on your current circumstances, as stated by him.

Three criteria to consider before deciding if refinancing is right for you are:

1. You can cut your rate by 50 basis points or more

Experts suggest that homeowners should wait for a significant decrease in mortgage rates before refinancing, with a difference of at least 50 basis points from their current rate, according to Zhao.

Channel stated that it's not a strict rule.

Experts recommend considering a refinance if mortgage rates have dropped one to two points since the loan was taken out, according to Ostrowski.

If your current mortgage has a high interest rate, you may want to wait until the central bank makes further cuts. According to Zhao, it is predicted that rates will gradually decrease throughout the rest of 2024 and into 2025.

2. You can afford refinance costs

You can pay for a refinance in two ways: either with cash upfront or by incorporating the cost into your new loan, increasing your monthly mortgage payment.

Refinancing a loan comes with costs, as Melissa Cohn, regional vice president of William Raveis Mortgage in New York, explained to CNBC last month.

The cost of refinancing a loan typically ranges from 2% to 6% of the loan amount being refinanced, according to Channel.

If you're refinancing a loan amount of $250,000, you can expect to pay between 2% to 6% of the total amount, which is approximately $5,000 to $15,000.

Before refinancing, ensure you can cover the expenses, including closing costs, appraisal, and title insurance, which may vary depending on your location.

3. Your savings will outweigh the costs

Channel advised looking into the "break-even point," or the moment when savings exceed the cost of refinancing.

If you decide to refinance your mortgage and it costs $6,000 and you're saving $200 a month, divide $6,000 by $200. The result is the number of months that you have before your refinance has "paid for itself."