The most recent inflation data shows that in January prices rose 3. 1% year over year. That’s still above the Federal Reserves’ 2% target, but it’s a significant improvement from when inflation spiked to over 9% in 2020-22.
In light of this, a number of real estate analysts forecast that mortgage rates for 30-year fixed-rate mortgages will decrease this year from their current levels in the mid-6s, though maybe not significantly.
This is the question we put to some experts: if rates fall by 1%, would that be enough movement to make it worthwhile for the current homeowners to refinance their mortgages, or would rates need to fall even further?
The housing market is a dynamic landscape, and mortgage rates are constantly in flux. If you’re a homeowner you might be wondering if it’s the right time to refinance your mortgage. While the traditional rule of thumb suggests a 2% reduction in your interest rate as the sweet spot for refinancing many experts now believe that a 1% drop can be enough to justify the process.
Throughout this extensive guide, we will examine the complexities of refinancing and weigh the advantages and disadvantages of reducing your mortgage rate by 1%. Additionally, we’ll give you the information and tools you need to decide whether refinancing is the best course of action for you.
The 1% Rule: A New Benchmark for Refinancing?
Traditionally, financial advisors have recommended refinancing your mortgage only if you can secure a rate that’s at least 2% lower than your current rate. This threshold ensured that the savings generated by the lower rate would outweigh the upfront costs associated with refinancing such as closing costs and application fees.
However, the current economic climate has prompted a shift in this conventional wisdom. Given that mortgage rates are currently hovering around historical lows, even a 1% reduction can result in significant savings over the course of your loan. This is particularly true for homeowners with high loan balances because a mere percentage reduction can result in interest payments reductions of thousands of dollars.
The Math Behind Refinancing for 1%
Let’s illustrate the potential savings with a concrete example. Imagine you have a $300,000 mortgage with a 5% interest rate. Over the course of the loan, you would pay $263,680 in interest, with your monthly payment coming to roughly $1,798.
Now, suppose you refinance your mortgage and secure a new rate of 4%. Your monthly payment would drop to $1,576, saving you $222 per month. You would save an astounding $77,520 in interest payments over the course of the loan.
Even though the 1% reduction in your interest rate might seem small, the cumulative savings over the years can be substantial. This is why many experts now believe that refinancing for 1% can be a wise financial decision, especially for homeowners who plan to stay in their homes for an extended period.
Factors to Consider Before Refinancing
While a 1% reduction in your interest rate can be enticing, it’s crucial to consider other factors before making a decision about refinancing. Here are some key aspects to weigh:
- Closing costs: Refinancing typically involves upfront costs, including origination fees, appraisal fees, and title insurance. These costs can range from 2% to 5% of the loan amount, so it’s essential to factor them into your calculations.
- Break-even point: The break-even point refers to the time it takes for the savings generated by your lower interest rate to offset the upfront costs of refinancing. If you plan to sell your home soon, refinancing might not make sense, as you might not recoup the closing costs before moving.
- Your financial goals: Consider your overall financial goals when deciding whether to refinance. If you’re aiming to pay off your mortgage faster, refinancing into a shorter-term loan with a higher monthly payment could be a good option.
- Your credit score: Your credit score plays a significant role in determining the interest rate you qualify for. If your credit score has improved since you took out your original mortgage, you might be able to secure a lower rate and make refinancing even more worthwhile.
Tools and Resources to Help You Decide
Several tools and resources can help you determine whether refinancing is the right move for you. Here are a few valuable options:
- Mortgage calculators: Online mortgage calculators allow you to input your current loan details and potential new rates to estimate your potential savings.
- Refinance lenders: Consult with multiple refinance lenders to compare interest rates, closing costs, and other terms.
- Financial advisors: A financial advisor can provide personalized guidance based on your unique financial situation and goals.
The Bottom Line: Is It Worth Refinancing for 1%?
The decision to refinance for 1% is a personal one that depends on your individual circumstances. By carefully considering the factors outlined above and utilizing the available tools and resources, you can make an informed choice that aligns with your financial goals.
If you have a large loan balance, intend to remain in your home for an extended period of time, and have good credit, refinancing for 1% could potentially save you a significant amount of money over the course of your loan. However, refinancing might not be the best choice for you if you have a small loan balance, intend to move soon, or have a low credit score.
Ultimately, the key is to weigh the potential benefits and drawbacks carefully and make a decision that aligns with your financial priorities.
Other considerations to know
In the event that you do not have any other debt to consolidate and you are not seeking to access your home’s equity, a one percent decrease in mortgage rates may not be justified if doing so would result in an increase in your mortgage interest rate. But if you can save money, it may be valuable.
“It will depend on the homeowner’s intended length of stay,” says Neil Christiansen, a Churchill Mortgage home loan expert and Certified Mortgage Advisor.
As an illustration, if the recovery period was 4% years, following a 1% decline in their rate, but they knew that their goal was to remain in the house for at least 2010 years, then it would make sense to think about paying the fee. The opposite will hold true if their stay is anything less than the calculated recoup time. The cost would outweigh the benefit,” he adds.
Is a 1% drop in mortgage rates worth refinancing?
For beginning homeowners, a 1% decline in mortgage refinancing rates does not imply that you could cut your current interest rate by 1%. If you locked in a mortgage during the pandemic at around 3%, then refinancing to, say, a 5. 5% mortgage if rates drop 1% from current levels could mean your mortgage gets more expensive.
Nonetheless, if you do a cash-out refinance that enables you to pay off other debt, a mortgage refinance might still be worthwhile.
Many of these homeowners probably have a sizable amount of equity in their homes, and some may be looking to consolidate their high credit card debt. Refinancing could result in significant monthly savings for them, according to Christy Bunce, president of New American Funding.
Refinancing could also help you pull cash out of your homes equity for things like renovations, adds Bunce.
Furthermore, if you find yourself in a scenario where you can reduce your mortgage rate by 1%, like if you purchased your home in 202023, then a mortgage refinance loan might be even more worthwhile. But you must do the math, taking into account the interest rate, the cost of refinancing your mortgage, and how long you intend to stay in your house.
Let us examine a scenario in which a 1% monthly rate drop saves you $200 in monthly payments; however, in order to receive that rate, you must pay $8,000 in closing costs. That implies you would need to save 40 months’ worth of money each month to cover the initial outlay,” says InstaMortgage founder and CEO Shashank Shekhar.
However, if you intend to remain in your house for a longer period of time, refinancing might be beneficial. And you might be able to shrink that timeline by finding a mortgage refi with lower closing costs.
“Sometimes, even a very small drop in rate with little-to-no closing cost can be beneficial,” says Shekhar.
When is it Worth Refinancing?
FAQ
Is it worth refinancing for 1%?
How much does 1% difference make in a mortgage?
What percent drop is worth refinancing?
Does it make sense to refinance for a lower interest rate?
Is a refinance worth it?
This means that even in a rising-rate environment, a refinance is still worthwhile for some homeowners. If you think you could get even a slightly lower rate, check to see if a refinance is worth it based on your new rate and savings. In this article (Skip to) Is it worth to refinance for 1 percent?
Will refinancing lower my interest rate?
Keep in mind that refinancing won’t always lower your interest rate. If you swap your 15-year mortgage for a 30-year mortgage, you could end up with a higher interest rate, but your monthly mortgage payment should also shrink because you’ll be paying off your mortgage loan in half the time.
How does a refinance rate work?
Say your current mortgage rate is 6.75%. Your refinance lender offers you a new rate of 5.75%. Instead of accepting the ultra-low mortgage rate, you ask the lender to pay your closing costs. The lender agrees, and in exchange, you accept a higher rate than the initial offer: 6.25% This arrangement only lowers your interest rate by 0.5%.
Should you refinance a mortgage if interest rates rise?
When mortgage interest rates rise, on the other hand, this would be an unwise strategy. While the previously mentioned reasons to refinance are all financially sound, mortgage refinancing can be a slippery slope to never-ending debt.