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Refinancing your mortgage is often a smart move. It can reduce your interest rate, lower your monthly payment, extend your loan term, or even give you access to much-needed cash in a pinch.
Now that the Federal Reserve has cut the federal funds rate for the first time in four years, it could be a good time to refinance if you bought your home in the last couple of years while rates were relatively high. Still, it’s important to factor in the cost of your new interest rate when deciding whether to refinance.
Dig deeper: When to refinance a mortgage
In this article:
Mortgage refinance rates today
As of the latest data from Zillow, the average interest rate when refinancing a 30-year fixed-rate mortgage is 5.90%. That’s down from the over-7% average seen just a month or two ago.
Overall, refinance mortgage rates have been trending downward in recent months. Here’s how refinance rates look across different loan types today, according to Zillow:
Refinance rates on government-backed mortgage programs like FHA and VA loans tend to be lower than those on conventional loans, regardless of whether they’re conforming, jumbo, fixed-rate, or adjustable-rate mortgages. However, as you can see above, that isn’t always the case.
Remember, though: Interest rates can vary widely by location and loan amount. In Indianapolis (ZIP code 46220), for instance, current mortgage refinance rates range from 6.625% to 7% on a $400,000 home with a $320,000 loan balance, assuming the homeowner has a credit score between 700 and 719 when refinancing.
Rates are usually higher if you opt for a cash-out refinance over a traditional rate-and-term refinance. These replace your existing mortgage with a larger one, giving you the difference in cash after closing.
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Mortgage refinance calculator
A mortgage refinance calculator can help you determine what today’s interest rates mean for your refinancing goals and budget. It can also help you determine what monthly payment you can expect so you can begin budgeting for your post-refinance payments.
Use our free mortgage calculator to see how a new loan term and interest rate would impact your finances.
How low should rates fall before I refinance?
If you’re refinancing to reduce your rate, the general rule of thumb is to shoot for a 1% reduction or more. So, if your current rate is 7%, it may be worth it to refinance once rates drop to 6%.
This doesn’t hold true for everyone, though, and homeowners with larger loan amounts will see a notable impact with even a small reduction. For example, on a $1 million loan with a 30-year term, a 7% interest rate equates to a $6,653 monthly payment toward the mortgage principal and interest. At a 6.50% rate, you’d pay just $6,321. The new mortgage rates may only be 0.50% lower, but you’d save about $332 per month.
The real key to determining if a refinance is worth it is to calculate your break-even point — or the month in which you’d save as much as the refinance costs you. To get this number, you need to divide the total costs of your refinance (usually about 2% to 6% of the mortgage principal) by the monthly savings the refinance will net you. If your refinance costs $10,000, for instance, and it saves you $300 per month, you’d break even in a little over 33 months (10,000 / 300).
As long as you’ll be in the home for 33 months or more, then refinancing at that new rate is worth it — at least financially speaking.
Read more: How soon can you refinance after buying a home?
Pros and cons of refinancing into a lower rate
If you’re able to refinance your mortgage loan to get a lower interest rate, it can have some serious benefits. These include:
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A lower monthly mortgage payment: This can ease financial stress and make it easier to pay your bills.
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Less in long-term interest costs: A lower interest rate can translate to paying much less interest over the long haul. For example, on a $400,000 loan, a 7% rate equates to over $558,000 in interest across 30 years. That drops to a little more than $463,000 at a 6% rate.
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More cash flow: This extra cash could allow you to invest more or achieve other financial goals.
The downside of refinancing is that it comes with closing costs, and unless you plan to stay in the home long enough to reach your break-even point, it may not be worth it. You will also need to go through the hassle of applying for a new loan, including a credit check and submitting documentation. Refinancing also changes the terms of your mortgage, which could make it take longer to pay off your loan. For example, if you have 20 years left on your original mortgage but refinance into a 30-year term, you’re adding 10 years to your repayment plan.
Learn more: How often can you refinance a mortgage?
How to get the best mortgage refinance rate
Interest rates depend on many factors, including your credit score, loan amount, location, and more. The rate you’d get on refinance could be very different from what a family member or even your neighbor might get.
To ensure you get the lowest rate possible, you should:
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Boost your credit score: Lenders generally reward a higher credit score with a better rate, as it indicates a more responsible borrower.
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Avoid taking cash out: Taking out money with a cash-out refinance means a larger loan amount. This typically means a higher interest rate, too.
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Compare lenders: Rates vary quite a bit between mortgage lenders, as each one has different appetites for risk, staffing capabilities, profit margins, and more. Always compare at least three or four mortgage lenders to ensure you get the best rate.
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Buy discount points: Discount points are an up-front fee (usually 1% of the home loan amount) that you pay at closing in exchange for a lower interest rate for the entire loan term. Some lenders also offer buydowns, which let you pay a slightly lower interest rate for the first few years of the loan. These can be great ways to get lower mortgage rates, but you should factor the extra expense into your closing costs.
A mortgage broker may also be able to help you snag a lower refinancing rate. These professionals help you with your application, shop around for mortgage lenders on your behalf, and help you find the best loan and rate for your budget. They’re usually paid via commission bythe lender you choose.
Refinance interest rate vs. APR
As you compare refinance lenders, you might notice some companies advertising an “interest rate” and others an “APR” (or maybe both at the same time). While similar, the two numbers indicate different costs.
The mortgage interest rate is simply what you’ll pay each year to borrow the money from your lender. The annual percentage rate (APR), on the other hand, is the total annual costs of the loan — including interest. It also includes expenses like discount points, fees, mortgage insurance, and other charges you’ll owe. It’s a more accurate representation of what you’ll actually pay each year.
Learn more: Mortgage interest vs. APR
Mind Your Money
Refinance mortgage rates: FAQs
Can you refinance a fixed-rate mortgage?
Yes, you can refinance a fixed-rate mortgage. You could refinance into another fixed-rate mortgage or into an adjustable-rate loan, if you like. You can also change the loan type or term, as well as your interest rate.
What are today’s rates for a refinance?
The average 30-year mortgage refinance rate is 5.90% today, according to Zillow. Keep in mind that rates are highly personalized, so the rate you’d qualify for on a refinance may be higher or lower than this average.
At what interest rate should you refinance?
Getting a 1% reduction in rate is a good goal to shoot for, though it depends on your goals and loan amount. Typically, smaller rate reductions will be felt more significantly on large loan amounts. (For example, a 0.25% drop would mean much more in savings on a $1 million loan than a $300,000 one.)
Is it a good idea to refinance right now?
It might be a good time to refinance, but it depends on your goals and the current terms of your loan. Overall, mortgage rates are declining, so if you got your loan in the last year or so while rates were higher, refinancing may be able to land you a lower interest rate and payment. But rates will likely continue to go down throughout 2024 and 2025, so it could save you even more money to hold out a little longer.
This article was edited by Laura Grace Tarpley.