Rates fluctuate daily. While today’s mortgage interest rates are slightly higher than all-time lows in January 2021, they have overall been consistently well below historical averages. For homebuyers and homeowners looking to refinance, that means there is still time to take advantage of these historically low mortgage rates.
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 there are many other factors beyond rates to consider before acting. It’s a notoriously tough market for buyers right now. Home prices have increased significantly over the past year, which means you might have to take on a larger loan amount with the same down payment. Even with a lower interest rate, the larger loan could eliminate any potential savings you might have otherwise seen.
On the other hand, current homeowners can take advantage of these low rates to refinance. Refinancing can provide several financial benefits, though there are a few things to consider in deciding whether now is the right time to refinance.
The Benefits to Refinancing: Example
Here’s an example showing how a refinance can result in a lower monthly payment and less interest paid over the life of a loan:
- Home purchase value: $500,000
- 10% down payment: $50,000
- 30-year mortgage
- 4.25% interest rate on the $450,000 loan (after down payment)
If you’ve been paying the loan for five years, you’d have a loan balance of roughly $408,000, according to the NextAdvisor mortgage calculator.
By taking out a new 30-year refinance loan at 3.125%, you would lower your monthly payment by $466 and save approximately $32,919 in interest.
|Loan Balance||Interest Rate||Monthly Principal and Interest||Total Interest Remaining|
|Loan Balance After 5 Years||$408,000||4.25%||$2,213||$254,298|
|Refinance Loan Amount||$408,000||3.125%||$1,747||$221,379|
Keep in mind that in this scenario, you’d be extending the time you’ll have mortgage payments by five extra years. It can still make sense in terms of interest savings, but if you’ve been paying down a mortgage for longer than 5 years, a better bet could be refinancing into a shorter-term mortgage. It might come with a higher monthly payment, but the interest savings could be even greater.
How to Decide If Refinancing Makes Sense for You
Refinancing your mortgage can be a smart money move, depending on your financial goals. First, think about what is most important to you in the short and long term. For instance, are you looking to lower your interest rate to minimize the total interest paid over the life of the loan? Or perhaps you are interested in lowering your monthly payments to be able to save and invest sooner?
Regardless of where interest rates currently stand, it’s important to take some time to consider your personal situation so any action you take aligns with your goals and circumstances. Here are some scenarios to think about.
How refinancing can improve your credit
If you decide to use your monthly savings to pay down your debt, you could also improve your credit. Part of your credit score is affected by the amount of debt you carry. Having a smaller amount of debt in relation to your total available credit generally results in a higher credit score. With a higher credit score, you would receive more favorable interest rates on other loans, such as a mortgage or a car loan.
How refinancing could help your retirement plans
Refinancing your home to lower your mortgage payment means you’ll have extra money each month to save for an emergency fund, pay down high-interest debt, or invest in retirement. By saving and investing earlier, you’ll be able to take advantage of the power of compound interest.
For example, if you were to invest $200 a month from ages 25 to 65 at a 7% rate of return, your investments would be worth approximately $500,000, according to the NextAdvisor savings calculator. Waiting until the age of 35 to invest the same amount, however, would give you less than $240,000 by the time you reach age 65.