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Mortgage rates have plunged in recent days, leaving many homeowners wondering if they should refinance their mortgages.
Considering the drop in rates, some borrowers could save by refinancing, but it depends on their existing rates, term length and the upfront costs associated with financing a new loan.
Annual percentage rates for 30-year fixed-rate mortgages have slid amid fears of a slowing economy, dropping to an average of 6.52% as of Tuesday, per Mortgage News Daily. That’s about 1% less than their 7.53% peak in April.
“If you can refinance your rate to be at least 1% lower than it currently is, it could be worth it,” says Dean Tsantes, a certified financial planner in Virginia. A rate reduction of 1% or 2% is usually when you start to see a significant reduction in monthly payments, typically a hundred bucks or more on a $300,000 loan.
While refinancing based on a rate difference of 1% isn’t always a slam-dunk decision, it’s worth considering whether it would save you money.
How to know if refinancing is right for you
There are a couple of important factors to consider before refinancing.
First is the break-even point, which is the time it takes for the savings from a lower rate to offset the upfront costs of closing a new mortgage, which is typically about 1% to 2% of the loan amount. In the case of a $300,000 mortgage, that’s around $5,000.
A break-even point of two years is a common rule of thumb, provided that you plan to stay in your home for that much time, or ideally, even longer.
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Another consideration is the loan term, which determines how much total interest you will pay on the loan. While you can extend your term to help lower monthly costs, you’ll want to know how much more interest you’d be paying before making that decision. You can run the numbers through a mortgage refinancing calculator.
Refinancing is a good idea if the difference in mortgage rates “allows you to reduce your monthly mortgage payment — especially if your budget is tight,” but also if you’re comfortable extending the term of loan, says Hazel Secco, a CFP in New Jersey.
Of course, with refinancing you’ll want to scrutinize the terms of the new agreement to ensure that there are no surprises. These could include prepayment penalties, unexpected fees or changes to the amortization schedule for your payments.
You could wait for mortgage rates to drop further
Whether you should refinance right now is another matter. That’s because major forecasts expect rates to continue to decrease further, with mortgage APRs getting closer to 6% in 2025.
Financial planners and mortgage experts who spoke to CNBC were split on whether it’s a good time to refinance considering rates could continue to fall.
“As I always tell my clients, I’m a planner, not a psychic, so I don’t try to time the market,” says Secco. “I wouldn’t let the current rate hold you back from purchasing a home or making major decisions — rates shouldn’t be the main obstacle.”
On the other hand, “a little bit of patience can go a long way, with rates expected to decline for the next 24 months,” says Sarah Alvarez, vice president at William Raveis Mortgage.
The bottom line is that waiting longer could mean more savings, but there are also no guarantees that rates will drop, either.
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