Refinancing your mortgage can be a smart decision. It could lower your interest rates, reduce your monthly payments, extend the term of your loan, or give you more readily available cash in times of financial stress.
The Federal Reserve recently cut interest rates for the first time in four years. So it might be worth considering refinancing if you bought your home in the last two years when interest rates were higher. However, be aware of the costs associated with the new interest rate.
According to the latest data from Zillow, the average interest rate to refinance a 30-year fixed-rate mortgage loan is currently 5.88%. This is a significant decrease compared to the values a few months ago.
In general, refinancing interest rates have shown a downward trend in recent months. Here’s what the current refinance rates look like for different types of loans, according to Zillow:
Loans backed by government programs such as FHA and VA loans typically have lower interest rates than conventional loans, whether they are conforming, jumbo, fixed-rate or adjustable-rate mortgages. However, this is not always the case, as the data shows.
Keep in mind that interest rates can vary greatly depending on location and loan amount. For example, in Indianapolis (Zip Code 46220), current 30-year mortgage refinance rates range from 6.49% to 6.99% for a $400,000 home with a loan balance of $320,000, assuming the borrower has one when refinancing Credit rating from 700 to 719 points.
Interest rates are typically higher if you choose a cash-out refinance as opposed to a traditional rate-and-term refinance. These replace your existing loan with a larger one, giving you the difference in cash after closing.
A mortgage refinance calculator can help you determine what today’s interest rates mean for your refinance goals and budget. They can also help you determine your expected monthly payment so you can start budgeting for your post-refinance payments.
If you want to lower your interest rates, the rule of thumb is to aim for a reduction of 1% or more. If your current interest rate is 7%, it might be worth considering refinancing once rates drop to 6%.
However, this doesn’t apply to everyone, and borrowers with larger loan amounts will see a noticeable difference with even a small reduction. For example, on a $1 million, 30-year loan, the monthly payment at 7% interest is $6,653 for the principal and interest portion of the mortgage. With an interest rate of 6.50%, you’ll only pay $6,321. The new interest rates could be just 0.50% lower, but you would save about $332 per month.
The key point in determining whether refinancing is worth it is calculating your break-even point – that is, the month in which you save as much as the refinancing costs you. To determine this number, divide the total cost of your refinance (typically around 2% to 6% of the mortgage principal) by the monthly savings the refinance will bring you. For example, if your refinance costs $10,000 and it saves you $300 a month, you would break even in just over 33 months (10,000 / 300).
As long as you stay in the property for longer than 33 months, refinancing at the new interest rate is worthwhile – at least from a financial perspective.
If you are able to refinance your mortgage to get a lower interest rate, this can have significant benefits. These include:
The downside to refinancing is the closing costs. Unless you plan on staying in the apartment long enough to reach the break-even point, it might not be worth it. You also have to go through the hassle of applying for a new loan, including a credit check and submitting documents. Refinancing also changes the terms of your mortgage, which could mean it takes longer to pay off the loan. For example, if you have 20 years left on your original mortgage but refinance to a 30-year term, add 10 years to your repayment plan.
Interest rates depend on many factors, including your credit score, loan amount, location, and more. The interest rate you get when you refinance could be very different than what a family member or even your neighbor gets.
To ensure you get the lowest interest rate, you should:
A mortgage broker could also help you get a lower refinance rate. These professionals will assist you with the application process, search for mortgage lenders on your behalf, and help you find the best loan and interest rate for your budget. They are usually paid through a commission from your chosen lender.
Refinance Rate vs. APR
When comparing refinance lenders, you may find that some companies quote an “interest rate” and others quote an “annual percentage rate” (APR), or possibly both at the same time. Although similar, the two numbers indicate different costs.
The mortgage interest rate is simply what you pay each year to borrow the money from your lender. The annual percentage rate (APR), on the other hand, is the total annual cost of the loan – including interest. It also includes costs such as discount points, fees, mortgage insurance and other expenses you incur. It is a more accurate representation of what you will actually pay each year.
Yes, you can refinance a fixed-rate mortgage. You could refinance into another fixed-rate mortgage or an adjustable-rate loan if you want. You can also change the loan type or term and interest rate.
What are today’s refinancing interest rates?
The average 30-year mortgage refinance rate today is 5.88%, according to Zillow. Keep in mind that interest rates are highly personalized, so the interest rate you receive when refinancing could be higher or lower than this average.
What interest rate should you refinance at?
Achieving a 1% reduction is a good goal to aim for, although it depends on your goals and loan amount. Typically, smaller interest rate reductions are more noticeable on large loan amounts. (For example, a 0.25% decrease would mean much more savings on a $1 million loan than on a $300,000 loan.)
Is it a good idea to refinance now?
It may well be worth refinancing now, but it depends on your goals and the current terms of your loan. Overall, mortgage rates are falling, so refinancing could potentially result in a lower interest rate and payment if you took out your loan in recent years when rates were higher. However, interest rates are expected to continue falling in 2024 and 2025, so waiting a little longer could save you even more money.
