Daily average mortgage rates recently dropped to 6.34%, the lowest for a 30-year fixed mortgage since April 2023. Rates have since ticked up slightly, but they are still near the lowest level in over a year. This significant decrease opens up a crucial question for homeowners: “Should I refinance my mortgage?”
With rates now lower than they’ve been in months, many homeowners are in a prime position to revisit their financial plans. Refinancing at a lower rate could result in substantial savings on monthly payments and reduce the total interest paid over the life of the loan.
To help you determine if refinancing is the right move, this Redfin article will explore the benefits, 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.
Should I refinance my mortgage since rates have decreased?
If you purchased your home during a period of higher interest rates, refinancing now could be advantageous since the rates have dropped. The rule of thumb is to refinance your mortgage when interest rates are at least 1% lower than your current rate. However, this is only sometimes the case. Based on your specific situation, it may be worth it to refinance when interest rates are only 0.5% lower, or it might be better to wait until interest rates are more than 1% lower than your current rate.
While this may seem like a minor adjustment, it can result in substantial long-term savings. A lower interest rate can lead to reduced monthly payments, a quicker payoff of the mortgage, and even the opportunity to tap into home equity for additional financial needs.
Make sure to keep a close watch on current mortgage rates when considering refinancing to ensure you make the most informed decision. If you’re considering refinancing your home loan, contact a mortgage company like Bay Equity Home Loans to explore your options and determine if refinancing is the best choice for your situation.
How refinancing could impact your savings
Let’s say 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 will be around $2,635. A year later, interest rates drop to 6.3%, so you decide to refinance. Your new monthly interest and principal payment will be reduced to approximately $2,435, which means you’ll save about $200 per month, equaling $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’re essentially starting a fresh 30-year period. This approach can lower your monthly payments, but may increase your overall interest payments over the life of the loan compared to your original mortgage. It’s important to review these factors with your lender to understand how refinancing will affect your long-term financial situation.
To get an estimate tailored to your circumstances, consider using a refinancing calculator like Bay Equity’s, which can help you assess the potential benefits and costs of refinancing.
How much does it cost to refinance your mortgage?
While there are many great reasons to refinance your mortgage, it can be surprisingly expensive. Overall, the total cost to refinance your mortgage can range from 2% to 6% of the loan amount. Below are the average costs when you refinance 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 things to consider before refinancing your mortgage
Aside from the cost of refinancing, there are a few other things to consider:
The break-even point
Your break-even point is when you will recoup all the closing costs that come with refinancing your loan. For example, assuming the lender and title fees are $5,000 and your monthly savings from refinancing is $200 per month, it would take 25 months to breakeven.
| Closing Costs | $5,000 |
| Monthly Savings | $200 |
| Breakeven | 25 months ($5,000/$200 = 25 months) |
In general, staying in your current house is best until you reach your break-even point to make sure that refinancing is worth it.
How much longer you plan to live in your home
When you’re refinancing your mortgage, one of the first things to consider is how much longer you want to stay in your home. Think about whether your current home will fit your lifestyle in the future. If you’re close to starting a family or having an empty nest, and you refinance now, there’s a chance you will only stay in your home for a short time to break even on the costs.
Similarly, if you’re close to paying off your current mortgage, refinancing may not be worth it, either.
Your credit score
If you recently took out another loan or made a late payment, your credit score may have gone down, which means it may not be the best time to refinance. Generally, the higher your credit score, the lower your interest. Most lenders require that borrowers have a minimum credit score of 620-670. Before you refinance, ensure your credit score has increased or stayed the same, and that you meet your lender’s minimum requirements.
Should I refinance my home? Final thoughts
Ultimately, deciding whether to refinance your mortgage depends on a range of factors, including your current interest rate, the costs of refinancing, and your long-term financial goals. With recent rates dropping and the potential for further declines, now may be an opportune time to consider refinancing.
*Note: The numbers in the example do not take into account the cost of refinancing.
The post Mortgage Rates Have Dropped: Should I Refinance My Mortgage? appeared first on Redfin | Real Estate Tips for Home Buying, Selling & More.
from Redfin | Real Estate Tips for Home Buying, Selling & More https://ift.tt/qK1vTjE
No comments:
Post a Comment