Recent reports show that daily average mortgage rates have dropped to 6.34%, the lowest for a 30-year fixed mortgage since April 2023. While rates have slightly increased since then, they remain near the lowest level in over a year. This significant decrease raises an important question for homeowners: “Is it time to refinance my mortgage?”
With rates now lower than they have been in months, many homeowners have the opportunity to review their financial plans. Refinancing at a lower rate could lead to significant savings on monthly payments and reduce the total interest paid over the loan’s life.
To help you determine if refinancing is the right choice, this Redfin article will delve into the benefits, costs, and considerations involved.
What does mortgage refinancing entail?
Refinancing a mortgage involves replacing your current home loan with a new one to secure better terms, such as a lower interest rate, reduced monthly payments, or changing the loan type or term. This process requires going through an application, approval, and closing process similar to obtaining the original mortgage.
Refinancing can help homeowners save money over time, access equity for home improvements or other expenses, or switch from an adjustable-rate mortgage to a more stable fixed-rate mortgage. However, it’s crucial to consider the costs and fees associated with refinancing to ensure it’s a financially beneficial decision.
Is it advisable to refinance my mortgage given the recent rate drop?
If you purchased your home during a period of higher interest rates, now might be a favorable time to refinance due to the rate drop. The general rule is to refinance your mortgage when interest rates are at least 1% lower than your current rate. However, depending on your specific circumstances, it could be beneficial to refinance even with a smaller rate difference.
Although seemingly minor, a lower interest rate can lead to significant long-term savings, including reduced monthly payments, quicker mortgage payoff, and the ability to tap into home equity for additional financial needs.
It’s essential to monitor current mortgage rates closely when considering refinancing to make an informed decision. If you are contemplating refinancing your home loan, starting with Redfin’s in-house mortgage company, Bay Equity Home Loans, can provide valuable insights into your options and help determine if refinancing is the best course of action for your situation.
The potential impact of refinancing on your savings
Let’s consider a scenario where you take out a 30-year, $400,000 mortgage with a fixed rate of 7.2% on your first home in Portland, OR. After a year, interest rates drop to 6.3%, prompting you to refinance. As a result, your new monthly payment will decrease, leading to substantial savings over the loan’s duration.
When refinancing into a new mortgage term, you essentially initiate a fresh 30-year period. While this may lower your monthly payments, it could potentially increase your overall interest payments compared to the original mortgage. Consulting with your lender is vital to understand how refinancing will impact your long-term financial standing.
For a personalized estimate based on your circumstances, utilizing a refinancing calculator like Bay Equity’s can assist in evaluating the potential benefits and costs of refinancing.
What are the costs associated with refinancing your mortgage?
While there are compelling reasons to refinance your mortgage, it can entail significant expenses. The total cost can range from 2% to 6% of the loan amount. Below are the average costs typically incurred during mortgage refinancing:
| Item | Average Cost | What You Need to Know |
|---|---|---|
| Appraisal | $300-650 | An appraisal determines your house’s current value for the lender to determine the mortgage amount. |
| Closing costs | 2-6% of the loan’s value | Includes various costs like appraisal, attorney fees, credit check, origination fees, title search, etc. |
| Credit check | $10-60 | Credit bureaus or third-party businesses conduct credit checks. |
| Mortgage insurance | 0.58-1.86% of the loan amount per year | Required if you’ve paid less than 20% of your home’s value. |
| Origination fees | 0-1% of the loan amount | Fee charged by lenders for loan processing. |
| Prepayment penalty | Varies | Fee for paying off the mortgage early, if applicable. |
| Title search | Up to $250 | Required by mortgage lenders during refinancing. |
Additional factors to ponder before refinancing your mortgage
Apart from the expenses incurred in refinancing, there are other considerations:
The break-even point
Your break-even point is when you recover all the closing costs associated with refinancing. It’s advisable to stay in your current home until you reach this point to ensure that refinancing is financially beneficial.
| Closing Costs | $5,000 |
| Monthly Savings | $200 |
| Breakeven | 25 months ($5,000/$200 = 25 months) |
In essence, it’s best to wait until you hit your break-even point before considering a move to guarantee the value of refinancing.
Length of time you plan to stay in your home
When refinancing, consider how long you intend to remain in your home. Factor in life changes like starting a family or downsizing to ensure that refinancing aligns with your future plans.
Similarly, if you are close to paying off your current mortgage, refinancing may not be the most advantageous option.
Your credit score
A recent loan or late payment might lower your credit score, impacting your refinancing decision. Generally, a higher credit score translates to lower interest rates. Lenders typically require a minimum credit score of 620-670. Ensure your credit score meets the lender’s criteria before refinancing.
Final thoughts on refinancing your home
Deciding whether to refinance your mortgage hinges on various factors, including current interest rates, refinancing costs, and long-term financial objectives. With rates dropping recently and the potential for further declines, now could be an ideal time to contemplate refinancing.
*Note: The numbers in the example do not include refinancing costs.