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When Does Refinancing Make Sense? How Low Should Your Interest Rate Go?

Is Refinancing Right Now Worth It?

Refinancing is worthwhile if you can cut your interest rate sufficiently to save money monthly and over time. Depending on the terms of your present loan, a rate reduction of 1%, 0.5%, or even 0.25% may be sufficient to make refinancing worthwhile.

This indicates that even in a rising-rate environment, refinancing benefits certain homeowners.

Check to determine if refinancing is worthwhile based on your new rate and savings if you believe you may obtain a little lower rate.

Is It Worthwhile to Refinance for 1%?

As a general rule, refinancing to save one percent is usually worthwhile. In most circumstances, a one-percentage-point rate reduction will result in considerable monthly cost reductions.

A rate reduction of one percent, from 3.75 percent to 2.75 percent, might save you $250 a month on a $250,000 loan. That is a decrease of approximately 20% in your monthly mortgage payment.

These monthly savings can be applied to day-to-day living expenditures, emergency cash, investments, or paid back into your mortgage to accelerate the loan’s payoff and save even more on interest.

Refinancing to Obtain a 1 Percent Lower Interest Rate

Remember that “breaking even” with your closing expenses is not the only way to decide whether refinancing is worthwhile.

A homeowner who intends to relocate or refinance again before the break-even threshold may choose either:

A refinancing with no closing costs is available.

Incorporating closing expenses into the refinancing loan.

No-Cost Mortgage Refinancing

A no-closing-cost refinance often involves the lender covering some or all of your closing expenses in return for a somewhat higher interest rate.

Accepting this increased interest rate will reduce your monthly savings. However, this plan can still be profitable if you continue to save sufficiently compared to your current home debt.

You would save closing expenses and save money each month, so there would be no break-even point to worry about.

This is typically a win-win scenario for borrowers who want to maintain their new loan for a few years.

Include Closing Fees in Your New Mortgage

Including closing expenses in the refinancing loan will increase the principle balance and total interest paid. However, if you want to maintain the loan for more than a few years, it may be more economical to include closing charges in the loan amount than to take a no-closing-cost loan with a higher interest rate.

“Most borrowers choose the second option – rolling the closing fees into the loan to obtain the lowest feasible interest rate. Tom Furey, co-founder of Neat Capital, explains why this is only necessarily the greatest option if you want to remain in your house for several years.

Is It Worthwhile to Refinance for 0.5%?

  • There are two main circumstances in which refinancing for a half-percent might be advantageous:
  • OR if you can persuade the lender to reimburse your closing fees with a no-cost refinancing loan.

Refinancing at a Rate of 0.5%: Break-Even Technique

Let’s examine a break-even situation first.

Remember that the less your rate declines, the less you will save each month. Consequently, it takes longer to repay your closing expenses and begin to experience “genuine” benefits.

  • On a $300,000 home loan, for instance, a 0.5% reduction in your interest rate, from 3.75 percent to 3.25 percent, may result in a $150 monthly savings.

That’s an excellent monthly saving, but it will likely take you more than three years to recoup your initial investment. Therefore, you must be confident that you will maintain the refinanced debt for at least that long.

Let’s analyze the statistics to see if you can reduce your mortgage interest rate by 0.5% through refinancing with no closing costs.

Refinancing at a Rate of 0.5%: No-Cost Closure Technique

Consider a mortgage rate of 3.75 percent. The new rate offered by your refinancing lender is 2.5%.

  • Instead of accepting the extremely low-interest rate, you request that the lender cover your closing costs. In exchange for the lender’s agreement, you accept a higher interest rate than the first offer: 3.25%
  • This agreement reduces your interest rate by only 0.5%. However, there is no break-even point because no closing costs were paid upfront. So you immediately begin to see “real savings” from your decreased monthly cost.

“It’s important to note that this is not true of all loan officers, but the vast majority tend to claim ‘no cost refis’ whenever feasible. Therefore, if you can save 0.5% in this instance, it’s a big bargain,” Meyer explains.

Monthly and long-term savings would be greater if you accepted the lower mortgage rate and paid closing expenses in advance.

Typically, those who can pay the closing fees out of pocket should do so.

However, it may make sense for households with little money to accept the higher, no-cost rate. This might make it possible for you to refinance and realize monthly savings without incurring any initial costs.

Is It Worthwhile to Refinance at 0.25 Percent?

As a general rule, experts assert that refinancing is only worthwhile once the interest rate is reduced by at least 0.5% to 1%. However, this may only be the case for some.

Refinancing at a 0.25 percent lower rate may be beneficial if:

  • You are moving to a fixed-rate mortgage from an adjustable-rate mortgage.
  • You have a substantial loan balance.
  • Refinancing can be used to consolidate high-interest loans.
  • With cash-out refinancing, you leverage your home’s equity.
  • You have a jumbo loan with much higher interest rates.

Refinancing Into a Loan With a Fixed Rate

“Assume you are refinancing from an adjustable rate to a fixed rate of 0.25% cheaper. Refinancing may make sense in this case. This is especially true if you anticipate an increase in interest rates, says Bruce Ailion, realtor and real estate attorney.

Refinancing a Substantial Loan Amount

A quarter-point rate reduction may also help a borrower with a significant outstanding balance.

David Reischer, attorney and CEO of, explains, “Even a 0.25 percent decrease in interest rates may result in considerable monthly savings for borrowers with big loans.”

Consider the following example from Steven Ho, senior loan officer at Quontic Bank, to demonstrate this point:

  • Consider a $500,000 mortgage with a 4.5% interest rate.
  • Your monthly principle and interest payment is $2,533, plus a $250 PMI payment.
  • Consequently, your total monthly payment is $2,785
  • You decide to refinance at a rate of 4.25 percent (0.25% less than your starting rate).
  • This would lower your monthly payment to $2,459, saving you $324.

“This equates to almost $19,000 in savings over five years,” Ho observes.

Even if you spend 2% in closing expenses on a $500,000 loan, your first outlay will be only $10,000. Within the first five years, you save approximately twice as much as you spend on refinancing.

Refinancing to Consolidate Debt

In the case of a debt consolidation refinance, refinancing at 0.25% is also prudent.

“Imagine you have a $20,000 credit card balance. “The interest rate on this credit card is 25%, which results in a monthly interest payment of $416,” explains Ho.

Say your initial mortgage debt was $500,000 at a fixed rate of 4.5%, resulting in a monthly mortgage payment of $2,533. But you decide to wrap your $20,000 credit card debt into your mortgage refi.

After refinancing to a 4.25 percent interest rate, you will have a mortgage of $520,000 and a higher monthly payment of $2,558.

“Your mortgage payments will increase by $28 per month. However, your monthly savings would total $391. This is because you are no longer paying 25% interest on your credit card debt,” explains Ho.

Cash-Out Refinancing and Home Improvements

Suppose you intend to withdraw cash throughout your refinancing. The decision to reduce your rate by 0.25 percentage points through a refinance becomes more complex.

“Your monthly mortgage payment may not decrease with a cash-out refinance,” adds Reischer.

“However, you can utilize the funds to consolidate other, higher-interest debts.” Alternatively, it can be utilized to undertake necessary house upgrades. This can be a very strong case for a cash-out refinance: making improvements that will boost the value of your home.

Consider refinancing to a shorter mortgage term, such as from a 30-year mortgage to a 15-year fixed-rate loan.

This might result in even lower refinancing rates. And it can result in lower interest payments throughout the loan, according to Ailion.

When Does It Make Sense to Refinance?

Refinancing is worthwhile if you can reduce your expenditures by obtaining a lower interest rate, a shorter loan term, or a lower monthly payment.

A lower interest rate will result in lower monthly payments than your current mortgage. Moreover, it usually implies that you will save thousands (or even tens of thousands) throughout the life of the loan.

However, these savings must be weighed against the inherent disadvantages of mortgage refinancing.

  • The refinancing closing expenses on the new mortgage are normally between 2 and 5 percent of the new loan amount. These include origination, application, legal, and appraisal costs.
  • You begin your loan term again, often for another 30 or 15 years.
  • If your new interest rate is insufficiently low, you may pay more interest in the long run since you will pay it for a longer period.

In addition, most individuals need to stay in their houses longer to pay off their mortgages. Therefore, you should ensure that the estimated savings are reasonable. Consider the time you intend to maintain your mortgage and the cost of refinancing up front.

“Determining whether the total expenses of refinancing are worthwhile relies greatly on how long you want to hold the loan,” explains Furey.

“Assume your primary purpose in refinancing is to save money. If so, you must assess if your long-term savings outweigh refinancing expenses.”

Use our refinance calculator to see if a mortgage refinance might be worthwhile.

Additional Reasons to Refinance (Besides a Lower Rate)

Most homeowners who refinance their current mortgages do so to reduce their monthly payments and interest rate.

However, there are other reasons to refinance. Although your new mortgage should save you money, there are various ways a loan can do this, and it does not always involve a reduced interest rate:

  • Replace an adjustable-rate mortgage with a fixed-rate mortgage.
  • Reduce mortgage insurance rates
  • Utilize equity
  • Reduce the loan’s term

Substitute an ARM

Eventually, the rates on adjustable-rate mortgages (ARMs) will begin to fluctuate annually with the broader market. Refinancing allows you to lock in a fixed rate depending on current market circumstances and your credit profile if you have an ARM.

Obtaining a fixed-rate mortgage can prevent the danger of incurring much higher interest payments in the future

Even if you initially have a greater payment on your fixed-rate mortgage, the loan might be paid off sooner if interest rates rise.

Do Away With Mortgage Insurance

FHA and USDA mortgages incur continuous mortgage insurance premiums. Along with their monthly mortgage payments, homeowners pay these fees to safeguard mortgage lenders against financial loss in the event of default.

FHA and USDA borrowers frequently continue to pay mortgage insurance for the duration of the loan.

You can avoid these costs by refinancing into a conventional loan that may not require mortgage insurance. Private mortgage insurance (PMI) is required on conventional loans until the loan total reaches 80% of the initial loan amount.

Even if you cannot significantly reduce your interest rate, dropping FHA or USDA mortgage insurance might save you significant money.

Withdraw Equity

Your home equity is the difference between your house’s worth and your mortgage balance.

A cash-out refinancing enables you to utilize this equity for debt consolidation, home upgrades, or even a down payment on another property.

Cash-out refinancing should also result in a cheaper interest rate. However, if you cannot decrease your interest rate or shorten your mortgage term, you may want to explore a home equity loan, or line of credit instead of a cash-out refinance.

Reduce Your Loan Period

Time is one of the most significant determinants of the home loan interest you’ll pay. Mortgage lenders have more time to collect interest with longer-term loans. Therefore, you will pay more interest on a 30-year loan than on a mortgage with a shorter duration.

Even if you do not obtain a lower interest rate, you might save money throughout the life of the loan by reducing its duration. Keep in mind, however, that your monthly mortgage payments may increase due to the shortened term.

When Does Refinancing Not Make Sense?

It is essential to know that refinancing resets the loan term. This indicates that you are extending the remaining principle and interest payments over a new 30-year or 15-year loan term.

This has significant ramifications for the cost of your new loan over time. Consequently, refinancing may not be worthwhile if:

  • You have been making payments on your initial debt for quite some time.
  • Refinancing increases total interest expenses.
  • Your credit score is insufficient to obtain a reduced interest rate.

You Have Had Your Present Mortgage for an Extended Period

As a result of extending the repayment duration to 40 years or more — and paying interest on all that ‘extra’ time — homeowners who have held their mortgages for at least a decade are less likely to see savings from a tiny rate cut.

One possibility is refinancing into a shorter loan term, such as a 20, 15, or 10-year mortgage, rather than starting over with a new 30-year loan.

Typically, shorter durations offer lower interest rates. And if you pay off the loan faster, you’ll save even more on interest.

However, bear in mind that the shorter the length of your loan, the greater your monthly payments will be. A shorter loan period is, thus only sometimes an economical alternative.

“However, if your initial loan was, say, $500,000 at 4%, and you’ve paid 11 years of payments, you could refinance into a 15-year term at 3% and only pay a few hundred dollars more per month, shaving four years of monthly payments,” adds Meyer.

Refinancing seldom makes sense when a homeowner is nearly through paying off their mortgage.

Refinancing Would Result in a Rise in Your Overall Interest Expense

If your new rate needs to be sufficiently high to create long-term savings, you may wind up paying more interest throughout the life of the loan.

Both of these refinancing possibilities result in monthly savings for the borrower. But only the first one, when the rate is reduced by 1%, results in long-term savings.

The second refinance option, which reduces the interest rate by 0.5%, will cost this borrower $16,000 more if the loan is kept for its entire duration.

The majority of homeowners only maintain their mortgages for part of the period. According to Freddie Mac data, the median number of years a homeowner will refinance their first mortgage is 3.6.

This alters the arithmetic. For example, someone who will only maintain the refinanced debt for 3 to 5 years will only pay less additional interest than someone who would have it for 30 years.

The correct choice also relies on the purpose of the refinancing.

Even the second refinance option may make sense if a homeowner’s income has decreased and they need to reduce their mortgage payments to afford them.

Perhaps one spouse or partner became a stay-at-home parent or lost their work during an economic recession.

If they can obtain a no-cost refinance and a rate decrease of 0.25 percentage points, they may be satisfied with their new loan’s $100 monthly savings despite the higher long-term cost.

Your Credit Score Isn’t High Enough to Refinance or to Get a Better Rate

If you have a poor credit score and cannot qualify for a reasonable mortgage interest rate, now is not the best time to refinance.

The greatest mortgage refinancing rates are often given to candidates with the strongest credit profiles.

You will not need flawless credit to obtain a competitive refinancing rate. An FHA refinancing is achievable with a credit score as low as 580. However, many lenders need credit ratings of at least 620.

If you cannot qualify for a loan with a lower interest rate than your present loan, consider increasing your credit score before applying.

Or, if you have an FHA-, USDA-, or VA-backed loan, inquire about Streamline refinancing. With a Streamline Refinance, getting a new mortgage without undergoing a credit check is possible.

Current Refinancing Rates

The conclusion? When the savings are larger than the cost, refinancing is advisable.

Ailion adds, “If refinancing rates are falling, it may be advantageous to wait to maximize the gap between your current rate and the new one.” However, when lower refinancing rates begin to climb, it’s a good idea to act.

Today’s mortgage rates are still relatively low, but they may only last for a while. Consider locking in a low refinancing rate to optimize your savings.

Utilize a mortgage calculator to determine if the numbers make sense, given your current financial condition. Or, start requesting estimates from different lenders using the form below.

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