- The average 30-year fixed-rate mortgage went up 0.08%, to 3.21%, last week
- Refinance applications went down 0.6% last week
- Mortgage applications went up 0.2% last week
- It may be worth refinancing if you can get a refinance rate at least 1% lower than your current mortgage rate, or if your credit score or income has improved since you purchased your home
Last week’s 30-year fixed-rate mortgage increased 0.08% to a new average of 3.21%. These are still incredibly low rates, around 1% lower than pre-pandemic levels, so you may want to act now if you are on the sidelines waiting for rates to drop back down.
Although rates are favorable, those looking to buy a new home may face some challenges. Due to a shortage of houses, buyers will need a larger down payment to offset the trend of increasing housing prices. Otherwise, they’ll need a larger loan to be able to afford the house, which could result in a higher monthly payment despite the low rate environment.
Those looking to refinance an existing home, however, can fully take advantage of the current low rates. Even a small amount of monthly savings can add up in the long run, so if you’ve previously passed on refinancing, you may want to consider a refinance now, especially if any of the following scenarios apply to you.
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.
The Benefits to Refinancing
If we take the following example, we can see that refinancing can offer a slew of benefits.
Let’s say you bought a home for $350,000 with 10% down and took out a 30-year mortgage at 4.25% for the $315,000 you needed to borrow. If you’ve been paying the loan for three years you’d have a remaining loan balance of roughly $297,900, according to the NextAdvisor mortgage calculator. By taking out a new 30-year refinance loan at 3.2%, you would lower your monthly payment by $261 and save close to $37,954 in interest over the loan’s life.
| Loan Balance | Interest Rate | Monthly Principal and Interest | Total Interest Remaining | |
|---|---|---|---|---|
| Current Loan | $297,900 | 4.25% | $1,549 | $203,926 |
| Refinance Loan | $297,900 | 3.2% | $1,288 | $165,972 |
| Difference | – | 1.05% | $261 | $37,954 |
Refinances almost always carry closing costs, so you’ll want to make sure you plan on staying in the home long enough to break even. To calculate the break even point, take your closing costs and divide it by the monthly savings you would see on the new loan. For example, on a loan with $2,400 in closing costs and a monthly savings of $100, the break even point would be 24 months.
If you plan on moving or selling the home before reaching your break even point, you may want to hold off on refinancing as you would not get enough of a benefit in the long run to justify paying the closing costs.
Here’s How to Know If It’s a Good Time to Consider a Refinance
If you’ve previously held off on refinancing because you didn’t think it would be worth it, you should reconsider that stance if any of the following scenarios apply to you. Rates do change on a daily basis, so you may want to refinance sooner rather than later while rates are still low.
1. Your current rate is at least 1% higher than current refinance rates.
As a general rule of thumb, refinancing can be worthwhile if your new rate will be at least 1% lower. Even if this does not translate to a significant amount of monthly savings, a small amount of savings can really add up over the life of your loan. Additionally, with a lower interest rate, a larger portion of your monthly payments goes towards paying down your principal balance, which means that you’ll also end up paying less in total interest charges.
2. Your credit score has improved since you purchased the home
Your interest rate is partially determined by your credit score. If your credit score has increased since you initially obtained your mortgage, you could be in a better position to secure a more favorable interest rate.
3. Your income has increased since you purchased the home
If you weren’t previously able to qualify for a refinance because of an issue with your debt-to-income ratio, it’s worth taking another look if your income has since increased. Even if you don’t think it’s gone up significantly, lending requirements change and you may find a lender willing to be more generous with your current income. Additionally, even if your income has stayed roughly the same since the last time you attempted to refinance, lenders may see it as a more stable source of employment and income given that more time has passed.
