In July, Freddie Mac reported that mortgage rates dropped to 3.02%, their lowest point since July 2016. Should you refinance your mortgage loan when interest rates are low? It’s a pretty good idea, but there are still a few other things to consider. Because, as we know, rates won’t stay this low forever.
Depending on the type of mortgage loan you have, along with the terms of your loan, it might be a good idea to refinance. Let’s dig deeper into your personal situation and figure out what works best for you taking into account the current 30-year mortgage rates.
What is Refinancing?
Okay, let’s take a big step back first. What is refinancing? Essentially, you’re trading in your old mortgage loan for a new one with (hopefully) better rates. You take out a new mortgage loan and use it to pay off your old one; this is called rate-and-term refinancing.
Now, you’re left to pay off the new loan, which either ensures you’re paying less each month or can reduce the length of your loan (or both). Because you’re taking out a whole new loan, this means that you’ll have to go through the loan application process again and also undergo another credit check. So, it’s crucial that you’ve been improving your credit since you first took out your initial mortgage loan.
What to Consider When Refinancing a Mortgage Loan
We’ll get to the current 30-year mortgage rates in a bit, but first let’s talk about a few things you need to consider when deciding whether or not it’s a good idea to refinance a mortgage loan.
How Much Have Interest Rates Dropped?
As mentioned above, interest rates on mortgage loans dropped to nearly 3% this year, which is the lowest they’ve been since 2016. The goal of refinancing a loan is to lower your monthly payments, and this usually happens by increasing the length of your loan or reducing your interest rates.
Depending on when you took out your loan, the current mortgage rates might be way lower than your initial interest rates. However, you also need to factor in the total amount of your loan. If interest rates have gone down 1% since you took out the loan, but the total loan amount is $400,000 then that’s quite a big chunk of money you’ll save.
What Are Your Loan Terms?
It’s important to consider the fact that you’ll likely have to pay closing costs on this new loan just as you did the first time around. So, if you don’t plan on keeping the loan for much longer, it might not make much sense to refinance. Do the math on how much you might save if you refinance now, pay the closing costs, and sell your home in the next few years.
However, if you’re able to reduce the overall length of your loan, it might be well worth the closing costs if it means big savings overall. If you currently have a 20-year mortgage and you’re able to refinance it into a 15-year mortgage at a much lower interest rate, then it can pay off in the long-run.
What Are the Current 30-Year Mortgage Rates?
Trying to find the current 30-year mortgage rates? Bankrate updates the rates daily, making it a great go-to source for general information. Currently, 30-year fixed mortgage rates are just above where they were in July, at about 3.03%. 15-year fixed rates are even lower at 2.55%.
Still not sure what those rates mean for you in terms of refinancing? If you have a 30-year mortgage (or really any other type of mortgage), it helps to take a look at the break-even point, which is the point at which refinancing pays off and your savings exceed that of the closing costs you owe.
Closing costs are usually anywhere from 2 to 6% of your loan amount. So, let’s consider you’re taking out a new $250,000 loan and your closing costs are 2% of the loan amount. Factoring in the current 30-year interest rates and all other fees, your break-even point might look something like this:
As Forbes notes in the breakdown, a break-even point of over 75 months is too long to make refinancing feasible.
Preparing to Refinance a Mortgage Loan
If you’re considering refinancing your mortgage loan while rates are low, you’ll need to prepare a bit beforehand. The easiest way to ensure you snag the lowest of low rates? Improve your credit score! To get the best rates, you’ll need a credit score of at least 700, but usually over 760.
Monitoring your credit score is the first step in improving it, and that’s what we’re here for. Float Credit is a totally free tool that allows you to not only see your credit score, but also to gain insight into what’s affecting it. We’ll update it every two weeks and send you helpful tips to improve it.
Simply looking for a mortgage loan? Check out our loan marketplace.
About the Author – ELIZABETH THORN
After receiving a degree in film from UCLA, Elizabeth left Los Angeles to travel the world and focus on storytelling and content creation. She has since worked as a freelancer and staff writer for publications in Europe, Asia, and North America, namely in the areas of travel, tech, finance, and business.