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The average 30-year fixed mortgage rate increased to 3.11% this week, up from 3% last week and the largest weekly increase since mid-March.
Even with this 0.11% increase, which puts today’s mortgage rates above their recent lows, they remain near their late-February levels — and well below historical rate averages. That means homebuyers can still secure a low interest rate on a home purchase, and existing homeowners can still take advantage through refinancing.
ABOUT THE LATEST MORTGAGE RATES
Last week’s average mortgage rate is based on mortgage rate information provided by national lenders to Bankrate.com, which like NextAdvisor is owned by Red Ventures.
But low rates don’t tell the whole story. Whether buying or refinancing, it’s important to think about what makes sense for your unique financial situation and goals. Home prices have increased in the past year, and without a larger down payment, you’d have to take on a larger loan amount.
Refinancing can do more than just get you a lower rate and lower monthly payment. If you are an existing homeowner, you could use these low rates to shorten the length of your mortgage to save in total interest paid, accelerate your payoff timeline, or finance expenses such as home improvement or college tuition.
Here are some ways a refinance can make financial sense:
The Benefits to Refinancing With a Lower Rate
Refinancing can lower your monthly payment in some cases, saving you thousands of dollars in interest. Here is an example showing how it can make sense:
- Home purchase price: $300,000
- 10% down payment: $30,000
- 30-year mortgage
- 4.5% interest rate on the $270,000 loan (after down payment)
Using the NextAdvisor mortgage calculator, after five years, the loan would be paid down to roughly $245,700.
By refinancing to a 30-year loan with a lower rate of 3%, the monthly payments are reduced by $233, and you would save almost $36,000 in total interest paid.
|Loan Balance||Interest Rate||Monthly Principal and Interest||Total Interest Remaining|
Keep in mind, it’s important to factor in closing costs with any loan. Depending on how much you save on your new rate, the closing costs could outweigh the benefits. You also want to consider the break even period, which is how long it will take you to recoup the cost of closing through the refinance savings.
Two Common Ways A Refinance Can Make Sense
A lower interest rate could potentially lower monthly payments and free up monthly cash flow. But there are other reasons a refinance could make financial sense, depending on your goals.
1. Shortening Your Loan Could Save You in the Long Run
For some homeowners, it can be a good move to shorten the length of your mortgage by refinancing from a 30-year mortgage to a 15-year mortgage. Shortening your loan term and taking on higher payments might seem counterintuitive in a low-rate environment, but you’d be able to pay off your house sooner and save more in interest over the long run.
Also, 15-year mortgage rates are typically less than that of a 30-year mortgage. So while your payment may be higher because of the shortened term, you’ll end up paying even less in interest over the life of the loan this way.
Using the NextAdvisor refinance calculator, here is an example of how much you can save in interest by refinancing to a 15-year mortgage:
|Pay Off Timeline||Principal (Before Interest)||Interest Paid (3% rate)||Total Cost Of Loan|
Shortening the mortgage this way would save you over $41,200.
2. Higher Monthly Payments May Be Affordable and Speeds Up Your Debt-Free Timeline
A common misconception is the payments on a 15-year mortgage will be twice that of a 30-year mortgage. However, depending on your specific loan, you may find that the mortgage payment may not be that much different than a 30-year mortgage.
For instance, a $150,000 loan at 3% paid over 30 years will have a monthly payment of $632. Here’s how that compares to a monthly payment with a new 15-year loan:
|Pay Off Timeline||Principal (Before Interest)||Monthly Payment @ 3% Interest|
Cutting the term of the loan in half through a refinance increases the payment to $1,035. That’s less than double the payment, yet you’ll pay off the mortgage twice as fast while saving on interest.
Another popular option is to pay a 30-year mortgage like it’s a 15-year. All you have to do is make additional payments, when you can, on your 30-year payments. Doing this regularly will accelerate the mortgage pay-off in the same way without the commitment to higher payments.
By refinancing and shortening your mortgage to a 15-year term, you’ll be able to keep more money in your pocket in the long run. Not only will you save in total interest paid, you will pay off your house more quickly. With no mortgage payment, you could use the extra cash flow to start a business, buy an investment home, pay for college tuition, invest and save for retirement, or travel.