Mortgage Rates Are Near Record Lows. Here's How to Figure Out If You Should Refinance

Updated: Jun 6, 2020


We'll walk you through the math.

If there is one word on the mind of every homeowner and financial planner right now, it’s this one: “Refinance”.

And for good reason. Mortgage interest rates are near historic lows: The average for a 30-year fixed rate loan was 3.36% for the week ended March 12, according to Freddie Mac. The average rate for a 15-year loan was 2.77% and for a five-year adjustable rate mortgage it was 3.01%

If that rate is much lower than what you’re paying right now, you can simply slide into a new loan and save on your monthly nut. A slam dunk, right?

Well, not so fast. While refinancing your home loan is a terrific idea for many, it may not be right for you – and that all depends on your personal circumstances. As the old adage goes: Just because you can, doesn’t mean you should.

“There are a few things you need to think about: Number one, can you lower your interest rate?” says Ilyce Glink, founder of financial wellness firm Best Money Moves. “Number two, can you shorten your loan term? Number three, can you lower your monthly payments? And number four, can you keep costs low on getting that refinance?

“If you can get all of those, that’s a total home run. And if you can get two or three, that’s where your own personal finances come in, and you have to think about what your best money move is.”

If refinancing is a fit for you, the savings could make a real difference for your bottom line: About 9.4 million borrowers in America could save an average of $272 a month if they refinanced at a lower rate, according to analytics firm Black Knight. “Our clients would be crazy not to call their mortgage brokers and take advantage of these rates,” says Tom Balcom, a financial planner in Lauderdale-by-the-Sea, Fla.

Should You Refinance Your Mortgage

So when should you sign on the dotted line of a refinanced home loan? Here are some factors to consider:

-Rate differential. What’s the spread in interest rates between what you’re paying right now, and what you could get in a new loan? The general rule of thumb historically has been that a 1% difference or more makes it worth your while to refinance – although these days it’s more like 0.5% or higher.

As an example, if you buy a $250,000 home and put down 20%, and are paying 5% interest on the balance for 30 years, that’s a monthly payment of $1,632. But with an interest rate of 3.5%, you’re saving almost $200 every single month.

Of course, we are in a prolonged era of rock-bottom rates, and you may be one of the millions of homeowners who have already refinanced. In that case, if the rate differential is only a quarter-point, it may not be worth the hassle, paperwork and extra fees to go through that process all over again. Typical closing costs, for instance, might be roughly $3,000-$5,000.

-Time in the home. Now you need to think about how long you’re going to stay in your current home. If you see yourself being there for a very long time, then refinancing to a lower rate may be a no-brainer.