When the Federal Reserve slashed interest rates close to zero, it did take some time for the reduction to filter down into the mortgage market. Mortgage rates are nowhere near that low, but they have declined a from where they were before the Fed cut rates to zero. In fact, mortgage rates are hovering around record-low levels. You may be wondering whether it’s worth refinancing your mortgage now that interest rates have fallen. There’s no easy answer because every mortgage must be considered on a case-by-case basis, but there are some things to think about when trying to decide whether to refinance.
What interest rate to look for
As a general rule of thumb, if you can refinance your mortgage and get an interest rate that’s at least two percentage points lower than what you are paying, it may be worth it to refinance. In some cases, you can even save money if you get a rate that’s only one percentage point below the rate you are paying. Some lenders may advise you that you can save a significant amount of money if you get an interest rate that’s only half a percentage point lower than what you are paying. However, you really have to look closely in this situation because there is a chance that they simply want you to refinance because of the closing costs and other fees you will pay them.
With the Fed’s pandemic-driven interest rate cut, mortgage refinance rates are running in the upper 2% to lower 3% range for 30-year fixed-rate mortgages. Of course, the rate you get will depend on your credit history, so you may end up with a rate higher than that. In addition to the interest rate, there is one other percentage you should look at when thinking about whether to refinance.
It’s the APR or annual percentage rate, which is the annual rate of interest you pay. The interest rate differs from the APR in that the APR includes not just the interest on the loan but also the other fees and costs associated with getting the loan, such as closing costs, discount points and other fees. In some ways, the APR may give you a better picture of what you will be paying, so it’s important to take that into consideration when considering whether to refinance.
Shop around for lenders
If you do consider refinancing, you should shop around to various lenders because some may offer you lower interest rates than others. You could save yourself thousands of dollars simply be shopping around to find the lowest rate.
Many people make the mistake of not checking with multiple lenders to find the lowest rate. One thing to take into consideration when you’re looking at different lenders is the quality of the lender. You may get a lower interest rate from a low-quality lender you’ve never heard of, but you may wish to go with a better-known lender and pay a slightly higher interest rate and APR instead.
The reason is that not every lender is reputable. Some lenders may cause you serious problems like miscalculating your escrow account year after year, resulting in higher and higher payments. Others may try to pressure you to refinance constantly even though you would get nothing out of refinancing. Some predatory lenders pressure you to refinance before the mortgage is even six months old in an attempt to get you to pay more closing costs and other fees for something that would not benefit you. While you can just ignore such attempts, dealing with constant phone calls can be a hassle for some people.
Other things to think about if refinancing
There is more than just the interest rate and APR to think about when it comes to deciding whether or not to refinance your mortgage. If you plan to roll the closing costs and other fees into the loan, you will need to take them into consideration when it comes to calculating your monthly payments.A good rule of thumb is to figure out whether you can recoup those closing costs in two to three years with the savings you will enjoy on a lower interest rate and APR.
To determine how long it will take you to break even on the added expenses of refinancing, add up the costs and points it will take to close the new mortgage. Then divide it by the amount you will save on your mortgage every month after refinancing to find out how long it will take you to break even. For example, if you will save $100 per month, and the closing costs to refinance amount to $3,200, it will take you 32 months to break even. One other factor is the amount of time you plan to keep the mortgage. If you’re likely to move in a year or two, it probably isn’t worth refinancing because it will take you too long to break even on those closing costs.
You should also think about whether you can shorten the term length of the loan. It’s usually not a good idea to go backward on your term, so if you’ve already paid five years on a 30-year mortgage, you might try to find a lender that will do a 20- or 25-year mortgage. They aren’t as common as 30-year mortgages, but you can find them.If you’ve played all your cards right, it might be possible to get a shorter-term and still have a lower monthly payment.
Michelle Jones was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Michelle has been with ValueWalk since 2012 and is now its editor-in-chief.