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While today’s mortgage interest rates are just slightly above January’s all-time low, they are still consistently below historical rate trends. They can change daily, but as long as they stay low, they will continue to provide opportunity for homebuyers and homeowners to benefit with a purchase or refinance.
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.
For homebuyers, taking advantage of low rates can help offset rising home prices. But the recent increases in housing prices can limit the impact of low rates. The more you spend on a home, the larger the down payment and loan amount. With a larger loan, you’ll end up paying more interest and have a higher monthly payment, which could quickly eat away at the savings you otherwise would have seen from a lower rate.
For many existing homeowners, the low refinance rates provide a good opportunity to save money on interest over the long-term. But refinancing needs to make financial sense in relation to your personal goals. Here are some of the benefits of refinancing and how to determine if it’s right for you:
How Refinancing Can Be Good for Homeowners
In some cases, refinancing can lower your monthly payment and save you thousands of dollars in interest. Consider this example showing how it can make sense for a homeowner:
- Home purchase value: $350,000
- 10% down payment: $35,000
- 30-year mortgage
- With a 4.25% interest rate on the $315,000 loan (after down payment)
If you’ve been paying the loan for three years, you’d have a loan balance of roughly $298,000, according to NextAdvisor’s mortgage calculator.
By taking out a new 30-year refinance loan at 3%, you would lower your monthly payment by $293 and save close to $50,000 in interest.
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What to Consider Before You Refinance
Mortgage rates are historically low, making it tempting to jump into a refinance. But, it may not be the best move depending on your situation and financial goals. Refinancing isn’t free, and you’ll have to pay closing costs. Depending on how much you save on your new rate, the closing costs could outweigh the benefits.
Here are three questions to ask yourself before you refinance:
1. When will you break even?
The break-even point is how long it takes for the monthly savings of a refinance to cover the closing costs. Closing costs typically range from 3% to 6% of your loan amount and include fees for the appraisal, title, and lender origination.
To ensure the potential savings from a refinance outweigh the cost of closing, first figure out the break-even period.
- Using the NextAdvisor refinance calculator, enter the following information:
- Current property value
- Current monthly payment
- Loan balance
- Years remaining on your loan
- Use the drop-down menu to select a mortgage refinance term (30-, 15-, 20-, or 10-year term).
- The calculator will show you how much you could save per month with a refinance.
- Closing costs can range from 3%-6% of the total loan. For example: 4% of a $200,000 loan would be $8,000 in closing costs.
- The break-even timeline: Use the total closing costs estimate and divide it by the monthly savings using this equation:
- Closing costs / monthly savings = break-even period (in months)
- Example: $8,000 (closing costs) / $250 (monthly savings) = 32 months. In this example, you would break even in 32 months — or 2.6 years.
2. How long do you plan to stay in the home?
It’s important to figure out how long you plan to stay in your current home before you refinance. If you move or sell your home before the break-even period is over, then the money spent to refinance will outweigh any savings. Take into consideration your long-term plans:
- How long do you plan to stay at your current job?
- Do you want to live somewhere else?
- Do you think you may relocate for other reasons?
It may not make sense to pay the fees involved with refinancing if you plan to leave before the savings kick in.
3. Have you already refinanced and when?
The same rules apply to multiple refinancing. If you refinanced already, how long ago was it? Even though there is no real limit to how many times you can refinance, you may want to wait until the break-even period for your last refinance is over first. If you overlap a new refinance over the existing break-even period then the savings may not play out. There also may be lender rules in place to prevent you from refinancing too soon after your last one.