Mortgage rates are near record lows. So should you refinance?

U.S. mortgage rates are at a years-long low. Here's how to decide if you should take advantage with a refinance.

refinance your mortgage
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The coronavirus pandemic has pushed mortgage rates to near-record lows over the last few months, and you don't have to be a home buyer to take advantage of them. If you refinance your mortgage to lock in the current interest rates, there's potential to save hundreds of dollars on your monthly mortgage payments, not to mention tens of thousands on interest payments over the life of your loan. 

At the same time, there are costs associated with refinancing, and it's important that the math makes sense in your situation. So how can you decide if refinancing your mortgage is the right move? And just how much can you save with today's rates? Find out more, below.

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Does refinancing make sense for me?

While refinancing your mortgage can potentially save you a lot of money over the life of your loan, it isn't for everybody.

In general, you'll need to weigh the upfront closing costs associated with refinancing against the amount you'll save. It's also a good idea to do the math and see how long it'll take you to recoup closing costs. If you plan to move in the next few years, you might find that you won't break even before you plan to sell. If you're staying put, on the other hand, refinancing will be a more lucrative option.

How much will I save if I refinance my mortgage?

The amount of money you'll save depends on a few things. The first is your existing mortgage rate, and how much higher it is than the current ones. Generally speaking, if you'll save more than 1 percent on your current rate, refinancing is a good idea, though in some cases it makes sense with even smaller margins.

"If you are saving at least 0.25 percent on your interest rate, it can be a great time to refinance. The interest savings can be significant, especially when looking at the long-term savings over the life of a loan," says Roger Brasil, a senior loan officer with Guaranteed Rate in Boston. "Many homeowners do not take advantage of refinance opportunities as they should and miss an opportunity to save a great deal on interest or to build equity faster, which is important if home values were to decrease."

Besides your current mortgage rate, the precise number you'll save also depends on factors like the loan balance on your existing mortgage, the length of your new loan term, and the interest rate you're able to secure for your refinance. 

To get a better sense of how considerable savings can be, Brasil offered the below example: 

Assume the loan balance on your current mortgage is $400,000. You secured the initial mortgage of $415,000 at a rate of 4.875 percent, and you're 26 months into the term. Your current principal and interest payment is $2,196/mo. with principal and interest, and the total interest remaining over about 28 years is $330k.

Now say you refinance the remaining $400,000 for 30 years. You have excellent credit and are able to secure a rate of 3.25 percent, a low in recent weeks. Your new monthly mortgage payment becomes $1,740/mo. with principal and interest. Not only will you save $456/mo. on your mortgage payment, but you'll save $104,000 in total interest over 30 years.

Can I pay off my house faster?

In some cases, the mortgage interest savings will be large enough that you can refinance for a shorter mortgage term a keep a similar monthly payment. 

Using the same $400,000 mortgage as above, Brasil offers a different scenario.

This time let's say you're comfortable with your monthly mortgage payment, but  want to pay off your house faster by refinancing for a shorter term. You choose a 20 year fixed-rate mortgage on the $400,000 loan amount. At the recent low rate of 3.125 percent, your mortgage payment goes up $72 a month, but you'll shave eight years off of your mortgage term and decrease the interest paid from from $330,000 to $144,000, a savings of $186,000 over the next 20 years. You'll also build equity faster.

If you can still make ends meet while paying a slightly higher mortgage rate, you could be mortgage free years sooner than you'd planned, and save tens of thousands in the process.

How much will it cost to refinance my mortgage?

The downside to refinancing a mortgage is, of course, the upfront costs, namely closing costs associated with originating any mortgage loan. So it's important to make sure you'll save enough on your payments to warrant the costs of securing a new loan.

The exact costs for refinancing your mortgage will depend on the loan amount, the  state where you live, the property type and you home's value, but plan on costs averaging between 2-5 percent of your loan amount. If you can't afford to pay the costs up front at closing, talk with your mortgage lender about options and whether the refinance still makes sense. 

"Homeowners that are worried about closings costs should know that there are $0-closing-cost options available," Brasil says. Common options for covering closing costs include rolling them into the loan amount, or using a lender credit in exchange for an increase on the mortgage rate (typically around .25 percent). 

How long will it take to refinance my mortgage?

There's a lot of refinancing happening right now, so closing times are taking longer than usual. Rate locks, the time period in which your secured interest rate is honored by your lender, are also operating on a modified timeline.

"Lenders are managing in influx of volume by requiring long term locks for refinances; 60-day or 90-day lock periods versus 30-day lock periods," Brasil says. "The refinance process can take about 45-60 days right now due to the high volume. However, some applications are still able to process very quickly, with no appraisal required, and taking less than 30 days. Each scenario is different and must be reviewed by an automated program to advise if a file can proceed without an appraisal."

Whether you have additional questions or are ready to refinance, your best bet is to talk to a loan officer to get a better understanding of your closing costs, plus what you can expect to save each month.

"Reach out to the loan officer that assisted with your purchase loan or the your most recent refinance loan, if you have refinanced in the past. Ask for a no-credit-pull quote and compare with a few reputable lenders or banks to find the best rate," says Brasil. Then, you'll have a better idea if refinancing is worth it.

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