The average 30-year mortgage rate peaked at 7.90% in late 2023, according to data from the Mortgage Bankers Association. Since that time, rates have cooled off considerably, with the average 30-year mortgage interest rate falling as low as 6.13% just a few weeks ago.
Since that time, rates have climbed back up a bit. The short explanation is that strong economic data has tempered expectations for future interest rate cuts. While the Federal Reserve is still widely expected to continue to lower its benchmark interest rate over the next year, it’s starting to look like the pace of those rate cuts won’t be as fast as many had expected after the Fed’s aggressive 50-basis-point rate cut in September.
Even after three consecutive weeks of rising mortgage rates, the average 30-year fixed-rate mortgage has an interest rate of 6.52%, still far less than borrowers were paying a year ago.
How much could you save by refinancing?
There are two main types of mortgage refinancing:
- Rate-and-term: A rate-and-term refinance is when a new loan is obtained for the same amount, with the main goal of reducing the interest rate.
- Cash-out: In a cash-out refinance, a new loan for more than the original amount is obtained, with the borrower receiving cash at closing.
While both can make good financial sense in certain circumstances, I’m going to focus on rate-and-term refinancing, since it’s fair to say that many people who bought homes in 2023 could now potentially take advantage of today’s interest rates.
So, how much could you save? Let’s say that you bought a home in late 2023 for $500,000 and got a 30-year mortgage with a 7.75% interest rate and a 20% down payment. This would give you a monthly principal and interest payment of $3,627.
If you were to refinance, the same loan with a 6.5% interest rate would lower your principal and interest payment to $3,290. In this case, refinancing would lower your monthly payment by $337.
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Consider the costs
On the other hand, it’s important to realize that deciding if refinancing is right for you isn’t as simple as figuring out how much lower your monthly payment will be. There are two big factors to keep in mind.
First, refinancing isn’t free. There are origination fees and other closing costs you’ll have to pay when refinancing, just like when you purchase a home and get a new mortgage. These costs can vary based on several factors, but it’s reasonable to expect 1% to 2% of the loan amount. So, on a $400,000 mortgage, it wouldn’t be unusual to have $6,000 or so in closing costs.
Second, keep in mind that when you refinance, you’re effectively resetting the clock on your mortgage. Let’s say that you have 27 years left on your existing mortgage and refinance to a new 30-year loan. Sure, your monthly payment would be lower, but you’ll be making those payments for three extra years. In many cases, refinancing could still be well worth it, but it’s important to consider these factors.
What if mortgage rates go even lower?
The most common question I’m asked when I suggest refinancing to a friend with a high mortgage rate is, “What if rates keep going down after I refinance?” That’s certainly a legitimate concern, and most experts are generally expecting mortgage rates to trend lower for at least the next year or so.
The key points to know are that nobody (not even the experts) knows exactly what mortgage rates are going to do. And there’s no rule that says you can’t refinance again with a top mortgage lender if rates keep going down. So don’t let the thought of future rate decreases keep you from saving money if the numbers work out in your favor today.