Update March 2020: 30-year fixed rates on 3/4 were at 3.0%-3.25%. If you’re looking for some good news to distract you right now, check out refinancing your mortgage. In November 2018, the average 30-year mortgage rate was nearly 5%. Right now, you can find 30-year rates at around 3.25% and lower with zero points. Mortgage rates are at all-time lows again, with the previous lows back in 2016 and 2012 (source):
At these lower rates, millions more homeowners can save money by refinancing rates, even after taking into account the loan fees (source). This is based on industry data on the rates of existing mortgages.
If you are refinancing, try to see if you can lower your rate, how much your lower monthly payment will be, and how long it will take to break even with the refinancing costs. Here is an example scenario from the WSJ:
WHEN IT IS WORTH REFINANCING
– Home buyer puts 20% down on a home worth $266,300, the median home price in January.
– No plans to move soon.
– Pays a 4% rate, resulting in a monthly payment excluding taxes, fees and insurance of $1,017.09, according to LendingTree.
– Dropping to a 3.25% rate would decrease the payment from $1,017.09 to $927.16. The homeowner would save around $90 a month, with exclusions.
– Assuming refinancing costs of $2,000, this homeowner would need to stay in the home for a little less than two years to make it worth the money.
If you are willing to take a slightly higher rate (negative points), you can even get a “no cost” refinance where the negative points cover your refinance costs. This way, your monthly costs go down with no upfront cost at all.
Bottom line. Due to coronavirus fears, interest rates are now at or nearing all-time lows. This also means that millions more homeowners may be able to lower their mortgage rate via a refinance. If you are serious, get an accurate full quote with all the costs involved with a reputable comparison site like LendingTree (tip: they will likely call whatever phone number you choose to enter) or go local and call up your neighborhood broker. If you are just curious, try an “instant quote” that doesn’t require any upfront information. If you do like what you see, lock in the rate as they can pop back up quickly.
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Would it be worth it (fees) to refinance, if able to lower mortgage rate by only 1% (e.g. from 4.50% to 3.50%)? Thanks in advance.
You should run a quote that includes both the new rate and also a good faith estimate of all of the closing costs required. I would also compare different scenarios of paying or getting paid “points” and rate combinations. But yes, a rough rule of thumb is that a rate difference of at least 0.75% to 1% would make it a good time to refinance. I would definitely try to refinance if I could drop my rate by a full 1%.
I like your article tried looking at lendingtree, cant find the “instant quot option” where I don’t have to give phone number, DOB, email, name, and SSN.
Thanks Mike M
If you visit the post-only link (here), there should be a Bankrate ad widget at the bottom of the text that lets you just input zip code and a few other parameters and get an instant quote.
I use these loan site consolidator sites frequently. I just put in a wrong phone number and create a junk email address to receive the quotes. If I get a good one, I call THEM!
I use the same practice with TrueCar and other services which would leave you inundated with unwanted phone calls which are difficult to stop.
One rule of thumb is if the costs to refi can be recouped in two year (by lower payments) it probably is a good deal. But beware of starting a new 30 year mortgage if you already paid off 5+ years
Can you provide more detail about this comment? I’m at little over 4 year mark. Would I not benefit much from refinancing at 5 year mark even if I could lower rate by 1%?
Daniel – If you refi with a new 30 yar loan you retset the calendar. Consider a 25 year note (or lower) and that way you still face the same payoff date
If already paid off 4+ years, it’s not worth it to start a new 30 yr mtg? I’m at 1.5 yr mark, so basically can stick with another 30 yr at lower rate? Thank you.
I would personally just get another 30-year and you can always make a bit of extra payment if you want the term to go down to 28 years, 25 years, 20 years whatever. The lower interest rate is more important. The only real decision for me would if I could stretch for the 15-year and get an even lower interest rate.
As someone who has refinanced three times (from a 30, to a 20, to a 15 year-term). A 1% drop in interest rates is a no-brainer to refinance. Just keep in mind the amortization schedule keeps resetting with each new loan, to where you pay a much larger percentage of interest over paying down the principle. In the long run, you will pay much less interest. But the advantage disappears if you don’t stay in the property for the long-run as you will have paid very little to your principle if you move after a short period of time. In this case, you will probably have been better off renting. Keep this in mind with each refinance. If you can, shorten the term of the loan for an even bigger bang!
In my case, I bought a second home during the valley in housing prices after the housing crisis (call it cost-averaging down into real estate) and kept my first house (a multi-family) as an investment property. Both will now be pad off in 2027 and I will retire down in Costa Rica where I will live like a king,
I thank Jonathon for helping me make many wise financial decisions over the past 20 years.
Good point, Mark. If you’ve paid 5+ years off, I’d consider refinancing to a 15-yr mortgage for an even lower rate. If you can manage the higher payments, you’ll greatly reduce the interest paid over the life of the loan.
Exactly. I had 30 yrs for 3.5% and refinance to 15 yrs at 2.875% 4 months back. Finally I can see light at the end of tunnel with 15 years 🙂
How much did your monthly payment change? (roughly)
It went up by around $700-$750
I was actually thinking about the same thing. But after reading your blog, you help me made-up my mind to do the refinance asap when the interest rate is still low. Thanks Bro!
If you want to run numbers on various scenarios this calculator is very useful: https://calculator.me/loan/missing-variable.php