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The 30-year average fixed mortgage rate fell to 3% last week, down 0.04% from the previous week and the lowest rates have been since February.
While today’s mortgage interest rates are slightly above their all-time low in January, they consistently remain below historic rate trends. They can change every day, but as long as they stay low, they will continue to allow buyers and homeowners to benefit from a purchase or refinance.
ABOUT THE LATEST MORTGAGE RATES
Last week’s average mortgage rate is based on mortgage rate information provided by national lenders to Bankrate.com, which, like NextAdvisor, is owned by Red Ventures.
For homebuyers, taking advantage of low rates can help offset rising home prices. But recent increases in house prices may limit the impact of low rates. The more you spend on a home, the larger the down payment and loan amount. With a larger loan, you’ll end up paying more interest and having a higher monthly payment, which could quickly eat into any savings you might otherwise have made with a lower rate.
For many existing homeowners, low refinance rates offer a good opportunity to save money on long-term interest. But refinancing must make financial sense in relation to your personal goals. Here are some of the benefits of refinancing and how to determine if it is right for you:
How refinancing can be good for homeowners
In some cases, refinancing can lower your monthly payment and save you thousands of dollars in interest. Consider this example showing how this can make sense to an owner:
- Purchase value of the home: $ 350,000
- 10% deposit: $ 35,000
- 30 year mortgage
- With an interest rate of 4.25% on the loan of $ 315,000 (after down payment)
If you’ve been paying off the loan for three years, you would have a loan balance of about $ 298,000, according to NextAdvisor’s mortgage calculator.
By taking out a new 30-year refinance loan at 3%, you reduce your monthly payment by $ 293 and save almost $ 50,000 in interest.
|Loan balance||Interest rate||Principal and monthly interest||Total interest remaining|
|Loan in progress||$ 298,000||4.25%||$ 1,549||$ 203,931|
|Refinancing loan||$ 298,000||3.00%||$ 1,256||$ 154,381|
|Difference||–||1.25%||$ 293||$ 49,550|
What to consider before refinancing
Mortgage rates are historically low, making it tempting to embark on refinancing. But, it might not be the best decision depending on your situation and your financial goals. Refinancing is not free and you will have to pay closing costs. Depending on how much you save on your new rate, the closing costs could outweigh the benefits.
Here are three questions to ask yourself before refinancing:
1. When will you hit the breakeven point?
The breakeven point is the time it takes for the monthly savings from a refinance to cover closing costs. Closing costs typically range from 3% to 6% of your loan amount and include the lender’s appraisal, title, and origination fees.
To ensure that the potential savings from a refinance outweigh the cost of closing, first determine the break-even period.
- Using the NextAdvisor refinancing calculator, enter the following information:
- Current property value
- Current monthly payment
- Loan balance
- Years left on your loan
- Use the drop-down menu to select a mortgage refinancing term (term of 30, 15, 20 or 10 years).
- The calculator will show you how much you could save per month with a refinance.
- Closing costs can range from 3% to 6% of the total loan amount. For example: 4% of a $ 200,000 loan would represent $ 8,000 in closing costs.
- The payback time: use the estimate of total closing costs and divide it by the monthly savings using this equation:
- Closing costs / monthly savings = break-even period (in months)
- Example: $ 8,000 (closing costs) / $ 250 (monthly savings) = 32 months. In this example, you will break even in 32 months, or 2.6 years.
2. How long do you plan to stay at home?
It is important to determine how long you plan to stay in your current home before refinancing. If you move or sell your home before the end of the break-even period, the money spent on refinancing will outweigh any savings. Consider your long-term plans:
- How long do you plan to stay in your current job?
- Do you want to live somewhere else?
- Do you think you can move for other reasons?
It might not make sense to pay the fees associated with refinancing if you plan to leave before the savings start.
3. Have you ever refinanced and when?
The same rules apply to multiple refinancing. If you’ve ever refinanced, how long ago was that? Even though there is no real limit to the number of times you can refinance, you may want to wait until the end of the break-even period for your last refinance first. If you overlap a new refinance over the existing break-even period, the savings may not be realized. There may also be lender rules in place to prevent you from refinancing too soon after your last one.