Average daily mortgage Interest rates have fallen recently That was 6.34%, the lowest rate since April 2023 for a 30-year fixed mortgage. Fee They have since risen slightly but are still near their lowest levels in over a year. This significant decline raises an important question for homeowners: Should I refinance my mortgage?
With interest rates at their lowest levels in months, now is the perfect time for many homeowners to reassess their financial plans. Refinancing to a lower interest rate could save you a lot of money on your monthly payments and reduce the total amount of interest you pay over the life of your loan.
To help you decide if refinancing is the right choice for you, this article from Redfin covers the benefits, costs, and considerations involved with refinancing.
What does it mean to refinance a mortgage?
Refinancing a mortgage is replacing your current mortgage with a new one, usually to secure better terms, such as a lower interest rate, lower monthly payments, or a change in loan type or term. The process requires you to go through the same application, approval, and closing process as you would if you were getting your original mortgage.
Refinancing can allow homeowners to save money in the long run, access equity for home improvements or other expenses, or switch from an adjustable-rate mortgage to a more stable fixed-rate mortgage. However, it’s important to consider the costs and fees associated with refinancing to make sure it’s a financially beneficial move.
Should I refinance my mortgage now that interest rates have dropped?
If you purchased a home when interest rates were high, you may be able to benefit from refinancing now when rates are lower. A good rule of thumb is to refinance your mortgage when the interest rate is at least 1% lower than your current rate. However, this is only sometimes true: Depending on your specific situation, it may be worth refinancing when interest rates are half a percentage point lower, or you may be better off waiting until rates are 1 percentage point or more lower than your current rate.
While this may seem like a small adjustment, it can add up to big savings in the long run. Lower interest rates mean lower monthly payments, faster mortgage payoffs, and even the opportunity to tap into your home equity for additional financial needs.
Keep an eye out for the latest information Mortgage interest rates When considering refinancing, talk to Redfin’s in-house mortgage lenders to help you make an informed decision. Bay Equity Home Loans is a great place to start, so contact them to explore your options and determine if refinancing is the best choice for your situation.
How refinancing affects savings
Let’s say you take out a $400,000 mortgage with a fixed interest rate of 7.2% for the first 30 years. Home in Portland, OregonYour monthly interest and principal payments will be approximately $2,635. A year later, interest rates have dropped to 6.3%, so you decide to refinance. Your new monthly interest and principal payments will be approximately $2,435, saving you approximately $200 per month, $2,400 per year, or $72,000 over the next 30 years.*
If you refinance to a new mortgage term (say, another 30 years), you are essentially starting a new 30-year term. This approach will lower your monthly payments, but may increase your overall interest payments over the life of the loan compared to your original mortgage. It’s important to review these factors with your lender to understand how refinancing will affect your long-term financial situation.
To get a quote tailored to your situation, Refinance Calculator There are also services, like Bay Equity, that can help you evaluate the potential benefits and costs of refinancing.
How much does it cost to refinance a mortgage?
While refinancing your mortgage has many benefits, it can also be surprisingly costly. Overall, The total cost of refinancing a mortgage can range from 2% to 6% of the loan amount.Below are the average costs of refinancing your mortgage.
| item | Average cost | What you need to know |
|---|---|---|
| evaluation | $300-650 | The appraisal determines the current value of the home so the lender can determine the mortgage amount. |
| Closing costs | 2-6% of the loan amount | Closing costs typically include an appraisal, attorney’s fees, credit investigation, loan fees, title search, and other costs associated with obtaining a new loan. |
| Credit Check | $10-60 | Credit reporting agencies such as Equifax, Experian, and TransUnion provide credit reports, as do third-party companies. |
| Mortgage Insurance | Annual rate: 0.58-1.86% | Typically, you’ll have to pay mortgage insurance if you put down less than 20% of the home’s value. |
| Origination Fee | 0-1% of the loan amount | An origination fee is a fee that a lender charges a customer when they make a loan. Origination fees vary depending on the lender you use and the loan you take out. |
| Prepayment Penalty | Various | You may have to pay a fee to pay off your previous mortgage early. Lenders impose prepayment penalties to encourage borrowers to pay off their loans slowly over time, allowing the lender to collect more interest. Read the terms and conditions or contact the lender to determine if this applies to you. |
| Title Search | Up to $250 | Mortgage lenders will require a title search when refinancing, just as they do when purchasing a new home. |
Other things to consider before refinancing your mortgage
Besides refinancing costs, there are a few other things to consider.
Break-even point
The break-even point is the point at which you’ll recoup all the closing costs associated with refinancing your loan. For example, if your lender and title fees are $5,000 and your monthly savings from refinancing are $200, it will take you 25 months to break even.
| Closing costs | $5,000 |
| Monthly savings | $200 |
| break even | 25 months ($5,000/$200 = 25 months) |
Generally, to see if refinancing is worth it, it’s best to stick with your current home until you’ve broken even.
How long do you plan to continue living in your home?
One of the first things to consider when refinancing your mortgage is how long you want to stay in your home. Think about whether your current home will fit your future lifestyle. If you’re close to starting a family or your children are about to leave the nest, refinancing now may mean you’ll only be in your home for a short time to recoup the costs.
Similarly, if your current mortgage is nearing its due date, refinancing may not be worth it.
Your credit score
If you have recently taken out another loan or made a late payment, Credit score Your credit score may be dropping, which means it may not be the best time to refinance. Generally, the higher your credit score, the lower your interest rate. Most lenders require borrowers to have a minimum credit score of 620 to 670. Before you refinance, make sure your credit score has gone up or stayed the same and that you meet the lender’s minimum requirements.
Should I refinance my mortgage? Final thoughts
Ultimately, the decision to refinance your mortgage depends on a variety of factors, including current interest rates, the costs it would cost to refinance, and your long-term financial goals. With interest rates falling recently and likely to fall further, now may be a good time to consider refinancing.
*Note: Example figures do not take into account refinancing costs.
