Are you considering a mortgage refinance loan? Here’s what a 1% rate cut can save you
The Federal Reserve’s current juggling of interest rates is an effort to revive a sluggish economy and reduce unemployment due to COVID-19. Mortgage rates remain low, although they have risen slightly as the economy begins to show signs of recovery.
If you are considering refinancing your mortgage, visit Credible to explore all of your refinancing options and compare rates from multiple mortgage lenders in one place. Then ask yourself: is it worth it to refinance your current mortgage for a new loan with an interest rate that is 1% lower than the current one?
The answer can be yes.
What is mortgage refinancing?
When you refinance your current mortgage with a new loan, it is called mortgage refinance. This comes down to generating additional income each month, especially if your new loan has a better rate and a better term.
When you refinance, you pay off your current mortgage balance with a new loan.
You could consider refinancing at:
- Lower your interest rate
- Shorten the term of your loan
- Convert your home equity to cash
- Switching from a variable rate loan to a fixed rate loan
- Reduce your monthly payments
- Get rid of private mortgage insurance (PMI)
Maybe you just want to change your mortgage provider. If that is the case, visit Credible to explore all of your mortgage refinancing options and compare rates and lenders in one place.
Is it worth refinancing for a 1% lower rate?
Most experts agree that it is worth refinancing if you can reduce your rate by 1% or more. It may not seem like a lot, but over time your savings can add up.
- Your current mortgage was $ 350,000. After paying off 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 at 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.
While your rates and savings vary, you’ll understand even better how much you can save on monthly mortgage payments using Credible’s free online tool.
How much does it cost to refinance your mortgage?
Typically, you can expect to pay between 2% and 5% of the closing costs when you refinance your mortgage. This means that on a loan of $ 300,000, you will spend between $ 6,000 and $ 15,000 in closing costs alone.
Closing costs generally include administration fees, set-up or subscription fees, appraisal fees, fees for checking your credit and for securities services, attorney fees, registration fees and survey and more. Freddie Mac points out that rates vary depending on the new loan amount and the state you live in.
What is a refinance with no closing costs?
Because closing costs are prepaid at the time of closing, you may not have the cash to fully cover all costs. A refinancing without closing costs means that your lender covers some or all of your closing costs. In return, your lender will likely ask you to pay a higher interest rate. While this saves you the trouble of finding cash up front, it can cost more in the long run because you’ll be paying a higher interest rate on your new loan.
When does it make sense to refinance?
Although mortgage interest rates are climbing a bit, they are still at historically low levels. If you want (or need) a lower interest rate to lower your monthly payments, it makes sense to refinance.
It also makes sense if:
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 plan 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 cannot find the closing costs
If you’re still not sure whether refinancing your home loan is the best option for you, visit Credible to connect with experienced loan officers and get all your mortgage refinancing questions answered.
Have a financial question, but don’t know who to ask? Email the Credible Money Expert at [email protected] and your question could be answered by Credible in our Money Expert section.