During the pandemic, with mortgage refinance rates at record lows, millions of Americans decided to refinance their mortgages. According to data from Freddie Mac, a total of $2.6 trillion of mortgage debt was refinanced in the U.S. in 2020, more than double the previous year.
Refinancing your mortgage at a lower interest rate can help you save thousands of dollars over the life of your loan, reduce your monthly mortgage payment, or pay off your mortgage faster. Depending on your home value, your current mortgage's interest rate, your credit score, your income, and other factors, you might qualify for a mortgage refinance.
If you're trying to decide whether it's the right time to refinance your mortgage, it's important to understand how a mortgage refinance can support your financial goals.
Why Get a Mortgage Refinance?
There are several reasons why you might want to get a mortgage refinance:
- It can reduce your monthly mortgage payment. Getting a mortgage refinance can save hundreds of dollars per month on your mortgage, freeing up money for other goals. According to recent statistics, non-cash-out refinancers with a 30-year fixed-rate mortgage saved over $2,800 in principal and interest annually. That average savings amounts to $233 per month.
- You can pay off your mortgage faster. Refinancing from a 30-year mortgage to a 15-year mortgage might help you get a lower or comparable monthly payment. Or you could put your monthly mortgage payment savings into additional principal-only payments on your refinanced mortgage to speed up your payoff period.
- To reap cash-out benefits. Some people choose to take a “cash-out" mortgage refinance loan, where they refinance their mortgage and borrow cash at a low interest rate in order to do home renovations, pay off higher-interest debts, or put money toward other goals.
No matter your financial goals, getting a mortgage refinance at a lower interest rate can potentially help you save tens of thousands of dollars on mortgage interest. Use our free mortgage refinance calculator to see how much you could save.
When's the Right Time for a Mortgage Refinance?
Every homeowner's situation is different, but depending on the current interest rate of your mortgage and how long you intend to stay in your home, getting a mortgage refinance might be the right financial decision.
“As a general rule of thumb, I advise my clients that if interest rates have decreased by 1% or more compared to your current loan terms, and if you intend to stay in your home for 5 or more years, it's likely a good time to refinance your home loan.”
- Jill Emanuel
Lead Financial Coach at Fiscal Fitness Phoenix
"I have had many clients with interest rates in the high 3% to low 5% on their mortgages refinance to rates in the mid 2% to low 3% range," she adds. "Staying in your home for 5 years will generally give you enough cost savings on your mortgage's interest to more than recapture the closing costs and processing fees of doing the mortgage refinance."
Before you decide to refinance, make sure you understand the closing costs involved with getting your new mortgage.
"Make sure that the total monthly savings offset the cost of refinancing, and calculate the break-even point which shows how long it will take for the cost of the mortgage refinance to pay for itself," says Nadia Evangelou, senior economist and director of forecasting for the National Association of REALTORS®. "To do so, divide the total closing costs by the amount you will save each month. The less time it takes to break even, the more sense it makes to refinance."
Not every homeowner's situation is the right fit for a mortgage refinance. Think carefully about your overall financial goals before you decide whether now is the right time. "There is no one-size-fits-all answer to this question. What works for one homeowner may not work for another," says Evangelou. "For instance, homeowners might consider refinancing if they want to lower their monthly mortgage payment or pay off their mortgage faster."
Keep Your Mortgage Term, Get a Lower Interest Rate
Some people who have already been paying their current mortgage for several years might not want to sign up for another 30 years of mortgage payments—but you don't have to. Depending on the lender, you might be able to refinance at a lower interest rate, but for the same term of years remaining on your current home loan.
“Underwriters can write the terms of the loan for any length of time you request," Emanuel explains. "If you currently have 23 years left on your mortgage, for example, you can ask to have your new mortgage written for a 23-year term."
If your goal is to reduce your monthly payment by as much as possible, you might see a bigger reduction by refinancing to a new 30-year term. But most lenders should be willing to offer a mortgage that matches your current term, helping you save on interest in the long run.
Why Refinance Your Mortgage Now?
Deciding on the right time for a mortgage refinance depends on your financial goals. But mortgage refinance rates have never been lower, and now might be the right time for you to refinance.
Evangelou says that based on the latest refinance trends that she's seeing, some borrowers are choosing a shorter loan term to pay off their mortgages faster, and some people are choosing cash-out refinances, but most people are choosing to lower their monthly payments.
"According to the finance mortgage provider Freddie Mac, one in four borrowers who refinanced shortened their loan term," she explains. "Compared to previous years, the percentage of cash-out refinances remains lower, as historic mortgage rates have created more opportunities for non-cash-out borrowers to refinance at lower rates and lower their monthly payments."
Whether you want a lower mortgage payment, want to take out cash to pay for home renovations or pay off other debts, or are motivated to pay off your mortgage faster, lower interest rates on home loans can help make it happen. Getting a mortgage refinance can give you more flexibility in your monthly budget and help you save money over the long term.