Recent data shows 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 now the right time to refinance my mortgage?”
With rates currently lower than they have been in months, many homeowners have the opportunity to reassess their financial strategies. Refinancing at a lower rate could lead to significant savings on monthly payments and reduce the total interest paid over the life of the loan.
To help you determine if refinancing is a wise decision, this Redfin article will delve into the advantages, costs, and considerations involved.
What does it mean to refinance a mortgage?
Refinancing a mortgage involves replacing your current home loan with a new one, typically to secure better terms, such as a lower interest rate, reduced monthly payments, or changing the loan type or term. This process requires you to go 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 important to consider the costs and fees associated with refinancing to ensure it’s a financially beneficial move.
Is it a good idea to refinance my mortgage with the recent decrease in rates?
If you initially bought your home during a period of higher interest rates, refinancing now could be advantageous 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, this rule may vary depending on your specific circumstances. It might be beneficial to refinance even when interest rates are only 0.5% lower, or it could be wiser to wait until rates are more than 1% lower than your current rate.
Despite seeming like a small adjustment, this can lead to significant long-term savings. A lower interest rate can result in reduced monthly payments, a quicker mortgage payoff, and the option to utilize home equity for additional financial needs.
It is essential to monitor current mortgage rates when contemplating refinancing to make an informed decision. If you are thinking about refinancing your home loan, starting with Redfin’s in-house mortgage company, Bay Equity Home Loans is a great step. Contact them to explore your options and assess whether refinancing is the right choice for your situation.
How refinancing could impact your savings
For example, if you take out a 30-year, $400,000 mortgage with a fixed rate of 7.2% on your first home in Portland, OR, your monthly interest and principal payment would be approximately $2,635. If interest rates drop a year later to 6.3%, and you decide to refinance, your new monthly payment would be reduced to around $2,435. This translates to saving about $200 per month, totaling $2,400 per year and $72,000 over the next 30 years.*
When refinancing into a new mortgage term—such as another 30 years—you essentially start a fresh 30-year period. While this can lower your monthly payments, it may increase your overall interest payments compared to your original mortgage. It’s crucial to discuss these aspects with your lender to understand how refinancing will impact your long-term financial outlook.
For a personalized estimate based on your situation, consider utilizing a refinancing calculator like Bay Equity’s to assess the potential advantages and costs of refinancing.
What are the costs associated with refinancing your mortgage?
While there are numerous benefits to refinancing your mortgage, it can also be quite costly. Generally, the total cost of refinancing your mortgage can range from 2% to 6% of the loan amount. Below are the average expenses involved in refinancing your mortgage.
| Item | Average Cost | What You Need to Know |
|---|---|---|
| Appraisal | $300-650 | An appraisal determines the current value of your house so that your lender can decide on the mortgage amount. |
| Closing costs | 2-6% of the loan’s value | Closing costs usually include an appraisal, attorney fees, a credit check, origination fees, title search, and other costs associated with taking out a new loan. |
| Credit check | $10-60 | Credit bureaus such as Equifax, Experian, and TransUnion offer credit checks, as do third-party businesses. |
| Mortgage insurance | 0.58-1.86% of the loan amount per year | Usually, if you have paid off less than 20% of your home’s value, you will have to pay mortgage insurance. |
| Origination fees | 0-1% of the loan amount | An origination fee is a fee that lenders charge customers to take out a loan. Origination fees vary depending on the lender you use and the loan you take out. |
| Prepayment penalty | Varies | You may have to pay a fee for paying off your previous mortgage early. Lenders charge prepayment penalties to incentivize borrowers to pay off their loan slowly over time, so the lender can collect more interest. Read the terms and conditions or contact your lender to determine if this applies to you. |
| Title search | Up to $250 | Mortgage lenders require a title search when you refinance, similar to when you buy a new home. |
Other factors to contemplate before refinancing your mortgage
In addition to the cost of refinancing, there are a few other aspects to consider:
The break-even point
Your break-even point is when you will recover all the closing costs associated with refinancing your loan. For instance, if the lender and title fees amount to $5,000 and your monthly savings from refinancing is $200, it would take 25 months to break even.
| Closing Costs | $5,000 |
| Monthly Savings | $200 |
| Break-even | 25 months ($5,000/$200 = 25 months) |
In general, it is advisable to stay in your current residence until you reach your break-even point to ensure that refinancing is a worthwhile decision.
How much longer you plan to reside in your home
When considering refinancing your mortgage, one of the primary factors to think about is how long you intend to stay in your current home. Consider whether your current home aligns with your future lifestyle. If you are nearing a life change, such as starting or expanding your family, refinancing now may not be the most beneficial option if you plan to move shortly to recoup the costs.
Likewise, if you are close to paying off your existing mortgage, refinancing may not be the most advantageous choice.
Your credit score
If you have recently taken out another loan or missed a payment, your credit score may have decreased, making it less favorable to refinance. Generally, a higher credit score results in lower interest rates. Most lenders require a minimum credit score of 620-670. Before refinancing, ensure that your credit score has improved or remained stable, and that you meet your lender’s minimum criteria.
Is refinancing my home a wise decision? Final thoughts
Ultimately, the decision to refinance your mortgage hinges on various factors, including your current interest rate, the expenses of refinancing, and your long-term financial objectives. With recent rate drops and the potential for further declines, now may be an ideal moment to contemplate refinancing.
*Note: The figures in the example do not include the cost of refinancing.