We want to help you make better informed decisions. Certain links on this page – clearly marked – may direct you to a partner website and earn us a referral commission. For more information, see How we make money.
The 30-year average fixed mortgage rate fell 0.1% to 2.78% this week, the biggest weekly drop since November 2020, according to Freddie Mac Rate Survey.
The drop in mortgage rates this week marks a second straight five-month low after four straight weeks of decline – great news for anyone considering refinancing.
As long as today’s mortgage interest rates stay close to these historic lows, the opportunity to refinance is there for homeowners who missed the boom from the previous pandemic refi. So if you haven’t looked at the mortgage refinance rates you qualify for recently, it might be worth it.
“For anyone who wants to refinance, they really need to talk to their bank or their loan officer and look at the numbers and see if that makes sense,” says Logan Mohtashami, analyst. Wire Housing, a mortgage media. If you can figure out what rate you’ll need to make financial sense, you’ll be ready to jump on a good deal.
Most experts recommend a rate anywhere from 0.75% to over 1% less than your current interest rate for refinancing to make sense. But rates aren’t the whole story. Here are the other things you should watch out for if you are considering refinancing your existing home loan.
What to know before refinancing
Refinancing isn’t as easy as swapping one loan for another and walking away with a lower interest rate. Here’s what to consider:
Closing costs and breakeven point
There are always fees when you refinance, also known as closing costs. They generally vary between 3% and 6% of the loan balance. Even with a refinance with no closing costs, you still pay. The fees are simply added to your total loan balance or built in at a higher interest rate.
To make sure the refinancing savings outweigh the cost of closing, you need to determine how long you plan to stay in the house and your breakeven period.
Here’s how to determine your payoff timeline:
- Using the NextAdvisor refinancing calculator, enter the following information:
- Current monthly payment
- Loan balance
- Years left on your loan
- Current property value
- Next, select a mortgage refinance term from the drop-down menu:
- 30 years
- 15 years old
- 20 years
- 10 years
- Monthly savings: The calculator will show you how much you could save per month with a refinance.
- Estimate closing costs: between 3% and 6% of the total loan amount.
- Example: 4% of a loan of $ 225,000 = $ 9,000
- To get your equilibrium period, take the total closing costs estimate it and divide it by the monthly savings using this equation: closing costs monthly savings = equilibrium period (in months)
- Example: $ 9,000 (closing costs) $ 280 (monthly savings) = 32.14 months
In the example above, you will break even in about 32 months, which is just under three years. If you sell your home or refinance before the breakeven period, you ultimately haven’t saved any money.
You should also pay attention to the repayment term of your new loan. If you’ve been paying off your mortgage for 10 years and take out a new 30-year refinance loan, you’ll have been paying a mortgage for 40 years by the time all is said and done.
You might save more money in interest with a shorter-term loan, like a 20-year loan or a 15-year loan, but the payments will be higher at a 30-year term.
Another option is to get a 30-year mortgage and make payments as if it were a 20-year loan. This gives you the flexibility to pay off the lower amount over 30 years while paying off your mortgage faster.
Refinancing of collection
Depending on your financial goals, you could turn your home equity into cash in the bank with a cash refinance. With a withdrawal refi, you will increase your loan balance and get the cash difference at closing. With rates this low, this is an opportunity to pay off other high interest loans or invest in home improvements that increase the value of your property. While refinancing with withdrawal isn’t guaranteed to lower your monthly payment, it may still be meaningful to you, depending on your goals.
Credit rating and equity
The low rates you see online may not be what you actually get. Rates are heavily determined by your credit score, type of mortgage, repayment terms, and how much equity you have accumulated. Talk to your lender about your finances to determine the rate you qualify for before submitting a full application and credit check. But any rate offered to you can change until you submit an application, your credit is taken out, and you lock in your rate.