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Key Takeaways
- A 1-point drop in mortgage rates can translate into hundreds of dollars in monthly savings.
- You can put extra money toward household bills, investing, or paying down debt faster.
- Closing costs can cut into your equity, so compare the fees to your monthly savings to determine how long it will take to break even and whether the refinancing is truly worth it.
- Restarting a 30-year term may reduce your monthly payment but could extend the life of your mortgage, so it’s important to calculate whether the long-term tradeoff is worth the immediate savings.
Over the last few years, mortgage rates have climbed significantly from the historic low of 2021. By late 2023, rates reached 8.01%, creating affordability challenges for many buyers. Now, as rates begin easing again, many homeowners are taking a closer look at refinancing. A single percentage point drop might make a noticeable difference in your monthly budget and total loan costs.
You Can Save Hundreds Refinancing at the Right Time
When interest rates drop, you may want to look at your mortgage to see if you can refinance and save money each month on your mortgage payment and total loan costs.
For example, suppose you purchased a $500,000 home in December 2023, put 20% down ($100,000), and financed the remaining $400,000 with a 30-year fixed mortgage at 7.40%. Your principal and interest payment at that rate would be approximately $2,769 per month.
After two years of payments, you would have paid your loan down to roughly $392,000. If mortgage rates then dropped to 6.30% and you decide to refinance that remaining balance into a new 30-year mortgage, your new principal and interest payment would fall to about $2,426 per month. That’s a savings of about $333 per month, or more than $4,000 per year.
| Example of Potential Savings from Refinancing | ||
|---|---|---|
| Total monthly cost | Total loan interest cost | |
| $400,000 30-year loan at 7.40% | $2,769 | $597,026 |
| $392,000 30-year loan at 6.30% | $2,426 | $540,154 (includes interest for the first two years of a 7.4% loan) |
| Savings | $333 | $56,872* |
*Does not include costs of refinancing, such as closing costs.
A drop of 1 percentage point may significantly improve your monthly cash flow and can save you in overall loan costs. In this case, saving over $300 per month can have a meaningful impact on your monthly budget if you need a little breathing room. It can cover household items such as insurance premiums, groceries, utility bills, or be used for credit cards or retirement savings.
Appraisals, Fees, and More to Keep in Mind
While refinancing offers clear benefits of a lower payment and monthly savings, it also comes with its own set of considerations, such as a new appraisal, closing costs and fees, how long it would take to breakeven, and the costs of going back to a 30-year term.
- You may need a new appraisal: Most lenders require an updated appraisal to confirm your home’s current market value. Some lenders may waive the appraisal if you already have a government-backed loan. Appraisals typically cost $300 to $500, depending on your market.
- Expect lender fees and closing costs: Refinancing usually includes loan origination fees, underwriting fees, credit checks, title fees, and other administrative costs. While some banks may offer low fees to refinance, borrowers can typically expect total closing costs of 2% to 6% of the loan amount.
- How long will it take before the refinance actually pays off?: In this scenario, if you are refinancing $392,000 and if you had to pay just 2% in closing costs, that is over $7,800. Additionally, you would start a new 30-year mortgage as well, so even though you are saving $333 per month, you would then be making an additional two years of payments. Basically, you would be starting over at a 30-year term, at an amount around the $400,000 you started out at two years ago by the time you include at least 2% fees and closing costs to refinance.
The Bottom Line
Ultimately, refinancing isn’t just about lowering your rate—it’s about maximizing your financial flexibility. A one-point drop can open your budget or help you manage rising costs. However, consider how much closing costs will be and how much it will add in payments by starting a new 30-year term. By understanding the true savings and the costs involved, homeowners can make a smart, informed decision about whether now is the right time to refinance.
