Considering a mortgage refinance loan? This is how much a 1% rate drop can save you
The current juggling of interest rates by the Federal Reserve is an effort to jump-start a sluggish economy and lower unemployment numbers due to COVID-19. Mortgage rates still remain low, although they have inched up slightly as the economy begins to show signs of gaining strength.
If you're considering refinancing your mortgage, visit Credible to explore all of your refinance options and compare rates from multiple mortgage lenders in one place. Then ask yourself — is it worth refinancing your current mortgage for a new loan that has an interest rate 1% lower than the current one?
The answer may be yes.
What is a mortgage refinance?
When you refinance your current mortgage with a new loan, it’s called a mortgage refinance. Doing so is like bringing in additional income every month, especially if your new loan has a better rate and term.
When you refinance, you pay off the balance on your current mortgage with a new loan.
You might consider refinancing to:
- Lower your interest rate
- Shorten the term of your loan
- Convert the equity in your home into cash
- Move from a variable rate to a fixed-interest rate loan
- Reduce your monthly payments
- Get rid of private mortgage insurance (PMI)
Maybe you simply want to change mortgage providers. If that’s the case, visit Credible to explore all of your mortgage refinance options and compare rates and lenders in one place.
4 THINGS TO KNOW BEFORE REFINANCING YOUR MORTGAGE
Is it worth refinancing for a 1% lower rate?
Most experts agree that it is worth refinancing if you can lower your rate by 1% or more. It may not sound like a lot, but over time your savings can add up.
- Your current mortgage loan was $350,000. After paying down your loan for 10 years, your balance is $270,994.00. Your current rate is 3.50%. Your current monthly payment is $1,571.66.
- You can refinance for a rate of 2.50%, which lowers your rate by 1%. Your new monthly payment will be $1,436.01, a savings of $135.65 per month.
Reducing your rate by just 1% will save you a total of $32,556.25 over the life of your new mortgage loan.
Although your rates and savings will vary, you’ll get an even better understanding of just how much you can save on monthly mortgage payments by using Credible's free online tool.
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What does it cost to refinance your mortgage?
Generally, you can expect to pay between 2% and 5% in closing costs when you refinance your mortgage. That means on a $300,000 loan, you will spend between $6,000 and $15,000 in closing costs alone.
Closing costs typically include an application fee, origination or underwriting fee, an appraisal fee, a fee to check your credit and for title services, lawyer fees, recording and survey fees and more. Freddie Mac points out that rates vary depending on the amount of the new loan and the state where you live.
3 SIGNS YOU SHOULD REFINANCE YOUR MORTGAGE RIGHT NOW
What is a no-closing cost refinance?
Because closing costs are paid upfront at the time of closing, you may not have the cash on hand to fully cover all the fees. A no-closing-cost refinance means your lender covers either a part of or all of your closing costs. In exchange, your lender will likely ask you to pay a higher interest rate. Although this saves you from coming up with the cash upfront, it can cost more in the long run because you’ll be paying a higher interest rate on your new loan.
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When it makes sense to refinance?
Although mortgage interest rates are creeping up a bit, they are still at historic lows. If you want (or need) a lower interest rate to lower your monthly payments, it makes sense to refinance.
It also makes sense if:
- You want to go from a variable-rate loan to a fixed-rate loan
- You want to cut down your loan term
- You want to turn the equity you have built up in your home into cash
- You can afford the closing costs
- You intend to stay in your house for a long period of time
- You want to stop paying private mortgage insurance
- Your credit has improved
When it doesn’t make sense to refinance
It makes sense to refinance your mortgage when interest rates are low. But there are times when refinancing isn’t the best choice. This may include:
- If you’re planning to sell before you hit the "break-even" period — the time it takes to recoup your closing costs based on your new monthly payment
- If the new loan lowers your interest rate by less than 1%
- You can’t come up with the closing costs
If you’re still not sure whether refinancing your home loan is the best option for you, visit Credible to get in touch with experienced loan officers and get all of your mortgage refinance questions
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