Why Refis Are Spiking and How to Optimize Your 401k Target-Date Fund for Long-Term Growth

0:00Sean Pyles:The following is a paid sponsorship, not an endorsement by NerdWallet's editorial team. Today's episode is sponsored by Bilt.

0:05Elizabeth Ayoola:You've heard me talk about Bilt as the loyalty program that lets you earn points on rent wherever you live, and they just leveled up even more. As of 2026, renters and homeowners can also earn up to 1.25x points on their housing payments.

0:22Sean Pyles:This is thanks to Bilt's three new credit cards, the Palladium Card, Obsidian Card, and Blue Card. All three can turn your housing payments, rent, or mortgage into flexible rewards. So you can choose the card that fits your lifestyle without missing out on points and exclusive benefits.

0:37Elizabeth Ayoola:Built points can be redeemed at top airlines and hotels, Amazon.com purchases, future rent payments, and so much more. Built points have also been ranked by top publications as the industry's most valuable point currency.

0:51Sean Pyles:Your housing payment is most likely your biggest expense. Make it your most rewarding. Find the card that fits your lifestyle and apply today at joinbuilt.com slash smartmoney. That's J-O-I-N-B-I-L-T dot com slash smartmoney. Make sure to use our URL so they know we sent you. Terms and limitations apply.

1:10Elizabeth Ayoola:Subject to approval and eligibility. Built cards are issued by Column N.A., member FDIC, pursuant to license from MasterCard International Incorporated. This episode is brought to you by Accenture. When your advertising operations fall out of sync, everything else follows. Spotify and Accenture are working together to reinvent the rhythm of ad sales, using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business. The result? Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. Learn more at Accenture.com slash Spotify.

1:52Sean Pyles:Investing for retirement is one of the toughest tasks we have in our personal financial lives. So many choices. How can you figure out what's right for you? Well, there's one option that can fairly be called a set-it-and-forget-it investment plan. They're target date funds, and today we're going to tell you all about them.

2:13Sean Pyles:Welcome to NerdWallet's Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Piles.

2:21Elizabeth Ayoola:And I'm Elizabeth Ayola. Later this episode, we'll be explaining what exactly a target date fund is and how to know if it's a good option for your retirement planning. But first up, our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money.

2:37Sean Pyles:Our news colleague, Anna Hilhoske, is back with a look at what's happening with the housing market. We're seeing a spike in home mortgage refinancing right now, despite the fact that the Federal Reserve hasn't cut rates since the end of last year. So rather than speculate, we have Kate Wood and Holden Lewis, two home mortgage experts at NordWallet, to unpack what's going on out there. Welcome back, Holden, Kate. Hello again. Hey. All right. So what are you both seeing out there? This summer, we're seeing that about half of mortgages are refinances. Now, I mean, that's not a ton of mortgages because hardly anyone is getting a mortgage nowadays.

3:11You know, home sales are depressed. But the fact is that about half of mortgages are refinances. So, you know, we're talking a bigger piece of a shrunken pie. Think like those mini pies that you get at like a gas station or a convenience store. It's really not a lot of people who are applying for home loans. But refinance is getting a lot of interest because many of the people who bought homes in the last two-ish years are really antsy to try to get a lower mortgage rate. So it's not surprising that people in that particular group want to refinance, but are rates really that much lower? And how do you know when it makes sense to refinance?

3:48Let's start with that second question. How do you know when it makes sense to refinance? There's all these different rules of thumb, but the one I subscribe to, I guess, is that if you can get a mortgage rate that's three quarters of a percentage point below your current rate, then you're probably in line for what's called a rate and term refinance. And that's just simply you get a mortgage for the same amount that you owed at a lower interest rate. And so that reduces your monthly payments and you save a lot of money over time. Over time is kind of the key here, because there was a point where lenders were getting really into offering buy now, refi later deals because they were just trying to take the sting out of higher interest rates.

4:33So unless you got one of those, refinancing does cost money. And so it's really important to know that you are fairly certain that you're going to stay in the home. Life happens, things could change, but at least your intention is not to move. Refi closing costs are usually 2 % to 6 % of the loan amount. So for a rate and term, that's 2 % to 6 % of whatever you still owe on your mortgage. So not to get too mathy, but you know, say you've got$300 ,000 to go, you're looking at$6 ,000 to $18 ,000 just to complete the refi. So if your goal is to save money, you're not really saving until the amount that you've saved from your rate drop is greater than what you spent to do the refi.

5:16So we call that the break-even point. It is pretty easy to calculate, but again, it can take years. And so if you're really thinking, here's my break-even point, you know, you're looking at it, it's six, seven, eight years out, and you're like, oh no, I'm selling this home like within three years, that refi might not be worth it. So you really should be staying in your home. You should be looking ahead. That's right. And, you know, we recommend using NerdWallet's Mortgage Refinance Calculator because that'll do the math for you, just kind of get you an idea of what that break even point is. And then you can just look into your future like, how much longer am I going to be in this house?

5:52Will it make sense? Will I save money before I sell the house? We'll add a link in the show notes to that calculator. So given everything you've both said, who is the best possible candidate for home refinance right now? Lately, mortgage rates have been stuck kind of between six and a half percent and six and three quarters percent. So, you know, you might be in the money to refinance if you have a mortgage with an interest rate of seven and a quarter percent to seven and a half percent. So that would be a reduction of three quarters of a percentage point. And for listeners who are thinking, wait, what?

6:28When did these people with these mortgage rates buy? Please let's remember that there have been plenty of times over the past 40 odd years when that would have been a dream interest rate for people. So it's really only if you're looking at a recent timeline that you're just like, what? When did these people buy? There was actually a brief period back in 2023, four and a half months from August to December 2023, there was a spike in mortgage rates and they were higher than seven and a quarter percent. They even approached 7.75%. So if your mortgage dates from that four and a half month period, you really might be in line to refinance and save some money.

7:12And that's about it. There was a couple of weeks in 2024, the end of April, beginning of May, where mortgage rates were a little higher. But, you know, there's just not a lot of people who are going to refinance, get a standard rate and term refinance and save money that way. In other words, that's not really the reason people are refinancing nowadays. It's not just to reduce their interest rate and their monthly payment. In fact, kind of the opposite. Forgive me, I'm not an expert here. If refinancing doesn't make sense for that many people, why are we seeing a spike in that demand? So we've so far been talking about rate and term refinances, where your main goal is lowering your interest rate.

7:56And I think for a lot of people, if they're thinking about refinancing, that's what they're thinking of, right? Because, you know, that's what you would do if you wanted to refinance a car loan or your student loans, for example, right? You're lowering your interest rate. With housing, the other most common type of refinance is called a cash-out refinance. So with a cash out, you're leveraging your home equity. So the amount of your home that you actually own, the lender doesn't own it, you've paid it off or it's home value that's accrued. So you're leveraging that to borrow more than what you currently owe on the home.

8:26Then at closing, you get the difference between what you still owe and that new loan amount as cash, hence cash out. According to the Urban Institute, about 60 % of refinances these days are cash out refinances. And why would you do that? You know, what are some of the reasons? There's a few reasons. in a low rate environment, you could potentially borrow money and reduce your interest rate. I mean, that feels like a win-win. Okay. So we're really not in that situation right now. So what some people are doing is they might actually be replacing their current mortgage with a mortgage with an even higher rate.

9:02So why would they do that when they're borrowing more money? It might be to free up that cash to make renovations on their home, or they might be paying off higher interest debt. I'm not recommending that, but a lot of people do that. They might have a whole lot of credit card debt and they say, all right, I'm going to cut my cards. I'm not going to use those cards anymore. I'm not going to add to the balances, but I'm going to reduce my interest rate from, say, 21 % to 7%. So there are probably, I'm assuming, plenty of people who are doing that. I mean, usually if you're looking at doing something like home renovation or debt consolidation and you're considering borrowing against home equity to do so, in a lot of cases you might look more to a second mortgage product like a home equity loan or a home equity line of credit.

9:50But there are times where cash out refinance would sort of be not even necessarily your best option, but your only option. And a really big one is in divorce. So when you get divorced, if you are both on that home loan and then one person gets the house in the divorce, the person who's keeping it has to refinance to remove the other party from that loan. So in some cases where you need that to happen, so you need essentially a new loan, and potentially you need to pay that person off some of the value of the home, right, their equity in the home, that might be a time that you'd be doing a cash-out refi.

10:28That makes a lot of sense. So the question on a lot of people's minds right now is when interest rates will drop. Now, there's been some murmurings and speculation about the Fed's next meeting later this month. And last month at the Kansas City Fed Conference in Jackson Hole, Fed Chair Powell hinted that a rate cut could be coming soon. But as we know, the Fed never makes any promises. What do you two think? The market seems fairly sure that the Fed is going to cut in September. I just don't know about that. I mean, I think that they might want to watch and wait a little longer to see what happens with inflation and employment.

11:06So I think that there's a fair chance that they will just stand still in September and then maybe do something, maybe cut rates in late October. If mortgage rates are what you're worrying about and you're looking at what the Fed's doing, it's really important to remember the Fed only controls one short term borrowing rate. They control the federal funds rate. They don't actually set mortgage interest rates. And mortgage interest rates go off of what the markets are doing, particularly what bond markets are doing. Honestly, sometimes it kind of feels like rates are going off of vibes. And so we've been in this sort of exuberant state where the markets are like, ooh, you know, feels like Powell gave us like a little wink wink that we might get a 25 basis point cut in September.

11:51Mortgage rates kind of have already gotten to that point, right? If you look at where they were in late July around the time of that Fed meeting and then going through August. So we've already seen a pretty significant decline there. So if you're thinking like, oh, OK, the Fed's going to cut. It's going to be a Wednesday, like Thursday. I'm going to be online. I'm going to be checking rates. You're probably not going to see a really big difference in mortgage rates. So they're not going to react as strongly as maybe some other financial products might. Yeah, I always compare mortgage rates to like a reactive dog where like you can't really go on the barking because they bark at everything.

12:27Like they just bark constantly. And so, you know, lenders are adjusting their rate offers throughout the day as different things happen in the markets, as world events happen. Someone in the Fed gives a speech. They change for literally everything. And so by the time the Fed, who is like the opposite dog, right, they are like the non-reactive dog, the quiet, deliberate dog. Yeah, they're like the cat, right? They're like, I'm not going to make a noise until this is legitimately I have a need. By the time the Fed actually is like, okay, yes, we're doing a thing. Mortgage rates have been doing a thing.

13:01All right. Well, I like that analogy. Thank you both for coming on and helping us out today. Thanks for having us. You're welcome.

13:07Sean Pyles:And thank you, Anna. All of this talk makes me really grateful that I locked in my mortgage in 2021. I'm one of those smug people who's never going to rebuy. That is it. Such a flex. Lucky. I'm one of those old people whose first mortgage was eight and a half percent. But I'm sure your house was a lot less expensive. Oh, my gosh. It was in Toledo, Ohio. And I think I bought it for five figures. Brick house, two stories, basement and a little creek in the backyard. Would love to see what that's worth now. Wow. Well, up next, we answer a listener's question about what exactly a target date fund is and whether it's the best option for retirement savings.

13:45Sean Pyles:But before we get into that, a reminder listener to send us your money questions.

13:49Elizabeth Ayoola:Maybe you're waiting for the Fed to cut interest rates next year and you're wondering how you can plan towards buying a house or you yourself want to make sure that your 401k is invested in a target date fund. Whatever your money questions are, please send them to us. You can leave us a voicemail or text us on the Nerd Hotline at 901-730-6373. For people at the back, that's 901-730-NERD. You can also email us at podcasts at nerdwallet.com.

14:15Sean Pyles:In a moment, this episode's money question. Stay with us. Today's episode is sponsored by Rula. Finding a therapist is hard enough, but finding one who actually takes your insurance, that's where most online therapy platforms fall short. Many don't work with insurance at all, which means you're stuck paying the full cost out of pocket or paying for an expensive monthly subscription.

14:38Elizabeth Ayoola:Rula does things differently. They partner with over 100 insurance plans, making the average copay just$15 per session. That's real therapy from licensed professionals at a price that actually makes sense. I mean, think about it. You use your insurance benefits to maintain your physical health. So why won't you do the same for your mental health?

14:57Sean Pyles:Rula isn't just affordable. The experience is tailored around you. Other online therapy platforms might match you with the first available provider, whether or not they're the right fit. Rula considers your goals, preferences, and background to provide you with a curated list of licensed in-network therapists who are actually aligned with what you need, because they know that finding the right therapist can make all the difference.

15:17Elizabeth Ayoola:No wait list, no frustrating back and forth. Rula makes it easy to find a mental health provider who is accepting new patients, and appointments are available as soon as tomorrow. Plus, Rula sticks with you throughout your journey, checking in to make sure your care is helping you move forward.

15:32Sean Pyles:Go to rula.com slash smartmoney to get started today. That's R-U-L-A dot com slash smart money for quality therapy that's covered by insurance.

15:41Elizabeth Ayoola:The average copay for Rula patients is$15, but depending on your benefits, your copay could be as little as$0 per session.

15:49Sean Pyles:Rula partners with a network of over 15 ,000 therapists and psychiatrists nationwide, enabling you to find your personalized solution and the right therapist for you based on your needs, preferences, and state requirements.

15:59Elizabeth Ayoola:Thousands of people are already using Rula to get affordable, high-quality therapy that's actually covered by insurance. Visit Rula.com slash smartmoney to get started.

16:10Sean Pyles:That's R-U-L-A dot com slash smartmoney. You deserve mental health care that works for you, not against your budget. The following is a paid sponsorship, not an endorsement by NerdWallet's editorial team. Today's episode is sponsored by Built.

16:22Elizabeth Ayoola:You've heard me talk about Built as the loyalty program that lets you earn points on rent wherever you live. and they just leveled up even more. As of 2026, renters and homeowners can also earn up to 1.25X points on their housing payments.

16:38Sean Pyles:This is thanks to Built's three new credit cards, the Palladium card, Obsidian card, and Blue card. All three can turn your housing payments, rent or mortgage into flexible rewards. So you can choose the card that fits your lifestyle without missing out on points and exclusive benefits.