Mortgage rates recently reached their lowest point in 13 months, leading many homeowners to ask if now is the right time to consider refinancing.
“A drop in interest rates is certainly one factor to consider in deciding to refinance, but it shouldn’t be the only factor,” said Joe Cartellone, BBVA Compass Director of Mortgage Banking and Home Equity. “Homeowners also need to consider how long they’ve had their current mortgage, the term of their current loan, how long they plan to remain in the home, and the overall amount of their remaining mortgage.”
Those additional factors can all contribute to the impact of that rate decrease on monthly payments. For example, on a $200,000 mortgage, each .25% rate change typically means about $25 difference in monthly payments. So the closer the existing mortgage rate is to refinance rate, the less advantageous it is to refinance.
It's probably not worthwhile to refinance just to save $50 a month.
“Given necessary closing costs and other expenses, it’s probably not worthwhile to refinance just to save $50 a month,” said Cartellone. “But if current low rates make it possible to refinance at a shorter term -- swapping a 30-year for a 15-year mortgage, for example -- that would definitely be financially beneficial.” Some or all closing costs can be rolled into the refinance amount, reducing out-of-pocket expenses, but increasing the overall loan amount.
A 30-year mortgage with a balance of $200,000 at 6.5% would require monthly payments of $1,265 -- costing $455,000 over the life of the loan. By shortening the term to 15 years -- which would increase payments by about $210 at 4% -- the homeowner would save nearly $200,000 over the life of the loan.
Refinancing may also make sense for homeowners who haven’t purchased or refinanced in the past 10 years or more. Those homeowners may see a rate difference of 2% or more, which could mean a monthly payment savings of at least $200 while keeping the same 30-year term.
As interest rates begin to tick back up slightly, it may be worthwhile talking to a mortgage banker about how you could save on your monthly payments, or reduce your total mortgage expense by refinancing at a shorter term.