The traditional rule of thumb is that it makes financial sense to refinance if the new rate is 2 percent or more below your existing interest rate. The new rate on a refinance must provide enough savings in monthly mortgage payment to justify the cost of refinancing.
Historically, the rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2%. However, many lenders say 1% savings is enough of an incentive to refinance.
A good rule of thumb is to refinance when you can lower your mortgage payment by at least 3/8ths or . 375% and the larger the principle balance, the smaller this may be.
When is it worth it to refinance? Refinancing is usually worth it if you can lower your interest rate enough to save money month to month and in the long term. Depending on your current loan, dropping your rate by 1 percent, 0.5 percent, or even 0.25 percent could be enough to make refinancing worth it.
If you have a $200,000 15-year loan at 5 percent, your monthly payment is $1,581.59, and at 5.25 percent, it increases to $1,607.76. The . 25 percent difference adds an extra $26 a month. Although that may not seem like a significant amount of money, it adds up to over $4,000 over the life of your loan.
Right now, a good mortgage rate for a 15–year fixed loan might be in the high–2% or low–3% range, while a good rate for a 30–year mortgage might range from 3–3.5% or above. You'd have to be lucky (and a very strong borrower) to find a 30–year fixed rate below 3% at this time.
Generally, a refinance is worthwhile if you'll be in the home long enough to reach the “break-even point” — the date at which your savings outweigh the closing costs you paid to refinance your loan. For example, let's say you'll save $200 per month by refinancing, and your closing costs will come in around $4,000.
Each point typically lowers the rate by 0.25 percent, so one point would lower a mortgage rate of 4 percent to 3.75 percent for the life of the loan.
Refinancing your mortgage, in general, should save you money over the life of the loan to be truly worth it. ... DiBugnara explains: “Say you end up saving $300 per month after refinancing, but your closing costs totaled $6,000. Here, you would recoup your costs in 20 months.
So how much should mortgage rates fall before you consider whether refinancing is worth it? The traditional rule of thumb says to refinance if your rate is 1% to 2% below your current rate. Make sure to factor in your current loan term when considering refinance though.
Whether or not you qualify for 2.25%, rates are ridiculously low. The truth is, the lowest advertised rates almost always go to top–tier borrowers; those with excellent credit scores and 20% down payments. So a 2.25% mortgage rate will be out of reach for many.
Other lenders are in noticeably better shape, however. In outright terms, that means rate quotes of 4.125% are common, 4.0% is not uncommon, and 3.875% is possible for the most flawless scenarios--especially in cases where borrowers are willing to pay a bit more in upfront closing costs to buy down the rate.
If your mortgage is only a couple of years old, and you can refinance to a significantly lower interest rate, lengthening your mortgage term inflicts only minimal damage. ... If you are 10 years or more into a 30-year loan, consider refinancing to a shorter-term loan, say, 20, 15 or 10 years.
Refinancing can lower your monthly payment, but it will often make the loan more expensive in the end if you're adding years to your mortgage. If you need to refinance to avoid losing your house, paying more, in the long run, might be worth it.
You Don't Plan on Staying in the House. If you plan on selling your home in the next five years, then hold off on refinancing it. The move will likely only waste your time and money. Selling too soon after refinancing means you won't live in your home long enough to capture the savings benefits of lower rates.
Your new interest rate should be at least . 5 percentage points lower than your current rate. The old rule of thumb was that you should refinance if you could get a rate that was 1 to 2 points lower than your current one.
By adding $300 to your monthly payment, you'll save just over $64,000 in interest and pay off your home over 11 years sooner. Consider another example. You have a remaining balance of $350,000 on your current home on a 30-year fixed rate mortgage.
Refinancing doesn't reset the repayment term of your loan, but it does replace your current loan with a new loan. You may be able to choose from different offers for your new loan depending on your goals, including a longer or shorter repayment term.
Refinance to get rid of PMI
If interest rates have dropped since you took out the mortgage, then you might consider refinancing to save money. Besides getting a lower rate, refinancing might also let you get rid of PMI if the new loan balance will be less than 80% of the home's value.
What do points cost? One mortgage point typically costs 1% of your loan total (for example, $2,000 on a $200,000 mortgage). So, if you buy two points — at $4,000 — you'll need to write a check for $4,000 when your mortgage closes.
Points don't have to be round numbers – you can pay 1.375 points ($1,375), 0.5 points ($500) or even 0.125 points ($125). The points are paid at closing and increase your closing costs. Paying points lowers your interest rate relative to the interest rate you could get with a zero-point loan at the same lender.
Points can be added to a mortgage loan when you refinance. ... One is discount points, which reduce the interest rate of your loan. The second type is origination points, which increase income for your lender and offset their expenses of making your mortgage loan. One point equals 1 percent of your mortgage loan amount.
Your Mortgage Refinancing Payoff Amount is Always Higher
Every month when making your payment you see your mortgage balance on your statement. ... When you apply for mortgage refinancing your payoff amount actually includes interest for the current month because you're only paid up through the end of the previous month.
When you refinance a loan, the original escrow account remains with the old loan. ... All the property tax and insurance payments you have made to that account, since the last payment was made, will be returned to you, usually within 45 days via wire transfer or check.
Home loan interest is tipped toward the early years. ... If you've had your loan for a while, more money is going to pay down principal. If you refinance, even at the same face amount, you start over again, initially paying more on interest. That, in effect, increases your mortgage.