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Today’s mortgage rates are quite a bit higher than the rates that hovered near 3% in late 2020 and early 2021. But they’re also quite a bit lower than the 8% (or higher) interest rates from October 2023. So, depending on when you purchased your home, you may be wondering if now is a good time to refinance.
After all, if you purchased your home when mortgage rates were at their peak last year, refinancing now could lead to meaningful savings. On the other hand, there are costs involved with a mortgage refinance related to the appraisal, application, loan origination and more. Considering these costs, how much do mortgage rates need to drop to make refinancing worth it?
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How much does mortgage interest need to drop to make refinancing worth it?
“This is the million dollar question, and it’s not the same for everyone,” says Earl Dell, SVP of national retail sales and acquisitions at Mutual of Omaha Mortgage. “A lot of this goes into what your current mortgage balance is at this time, and how long you plan to stay in your home.”
For example, let’s say you owe $250,000 on your home with a 30-year mortgage at 8.35%. You could refinance your home with a new 30-year mortgage with a lower interest rate of 7.25%, but doing so comes with fees that range, on average, from 3% to 5%. If we’re assuming 3%, that would equal about $7,500 in fees.
At the current rate of 8.35%, you would pay $433,433 in interest in total over the life of your mortgage loan. However, if you refinance your home with a 30-year loan at a 7.25% interest, you would pay a total of $364,365 in interest over the life of the loan. And, after accounting for the $7,500 in fees, refinancing would result in a total savings of $61,568 in interest over the life of your mortgage.
If you have a mortgage with a higher balance and rate, a drop of 0.5% interest could be worth refinancing, according to Dell. “For a lower balance, rate and term refinance, it may be at least 1% or more to be worth your time and money,” Dell says.
It’s also important to consider how long you plan on living in the home, according to Dell.
“If you plan on moving in the next two years, I would hold off from refinancing,” he says.
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Is refinancing worth it at a higher interest rate?
If your current mortgage rate is lower than today’s rates, there may be no long-term interest savings when you refinance. However, mortgage refinancing may still be worth considering in certain cases. For example, you could refinance from a 30-year loan term to a 15-year loan term at a slightly higher rate to pay off your mortgage loan quickly. Or, you could use cash-out refinance at a slightly higher rate to pay off high-interest debt if a home equity loan isn’t an option.
Tap into your home equity with a cash-out refinance now.
The bottom line
There are numerous factors to consider before refinancing your loan — but your new mortgage rate plays a large part in whether or not it makes sense to do so. And, while a 1% drop in mortgage rates nearly always makes sense to consider, in certain cases, even a slight drop in mortgage rates could make refinancing worth it — especially if you plan to stay in your home for the long term. Before you make any decisions, though, just make sure to understand the short- and long-term implications of refinancing your mortgage loan to ensure that it’s the right move for you.
Source: cbsnews.com