Mortgage rates fell in April, meaning millions of homeowners could refinance to lower their monthly payments, Bank Rates analysis showed.
The average interest rate on the most popular type of mortgage, a 30-year fixed mortgage, fell to 6.34%, down 12 basis points since the beginning of the month, according to Bankrate’s latest estimates. Mortgage rates, largely linked to bond markets, have fallen steadily from this year’s highs as the U.S. and Iran seek to end the conflict and hopefully free up shipping lanes that supply 20% of the world’s oil.
An analysis of lending data by Bankrate found that about 2.7 million homeowners with 30-year fixed mortgages could reduce their payments by refinancing now. And for every one basis point, or one-hundredth of a point, in current interest rates, approximately 90,000 more homeowners would benefit from refinancing.
“22% of mortgage balances are above 6%, and we know there are a lot of people making this argument right now,” said Joel Varner, senior economist at Realtor.com. “If you’re in the low 7s, I would say you absolutely should[refinance]now.”
Here’s what you need to know about refinancing in today’s market.
Refinancing could save homeowners up to $26 billion over five years
Mortgage rates are at the heart of home affordability and determine how much a borrower pays each month. With interest rates around 6%, millions of homeowners who locked in loans above 7% have the opportunity to refinance, potentially lowering their payments over the next five years and unlocking nearly $26 billion in total savings, according to a Bankrate analysis of data from consulting firm ICE Mortgage Technology.
Andy Worden, head of mortgage and housing market research at ICE Mortgage Technology, said saving at least 75 basis points on interest rates could lower monthly payments enough to offset the closing costs of refinancing a home.
If interest rates were to drop to 6%, a total of 5.3 million homeowners would benefit from refinancing. At 5.88%, that number jumps to 6.3 million homeowners.
“Depending on where you are in the interest rate distribution, as you go down into the 6% and 5.875% range, you’re going to pick up more refinancers,” Worden said.
Ryan Katherine, 30, of Salt Lake City, is in no hurry to refinance the home he and his partner own. She says the 6.625% mortgage rate needs to drop by at least 1 percentage point before refinancing. For her, that standard is ultimately tied to her long-term goal of renting out her home.
At 5.625%, Katherine believes her mortgage payments will be about the same as what it would cost to rent out her home, allowing her to turn her home into equity at no additional cost.
“All I really want is to follow a simple cut-and-dry rule. For me, that means waiting until 1%,” Katherine said.
The potential savings from refinancing depends on both the size of the interest rate reduction and the size of the loan.
For example, on a $399,600 mortgage, the average refinance application size, the monthly payment would be $2,146 at 7.09%, but $1,987 at 6.34%. That’s a difference of about $160 per month and about $1,900 per year.
Depending on your bank’s loan refinance fees, this amount of savings could potentially pay off your refinancing costs in as little as three years.
How to decide if refinancing your mortgage makes sense for you
Lower interest rates can be a catalyst, but they are not the only variable in the refinancing equation. You need to weigh your immediate savings against your long-term plans for a home and the initial cost of a new loan. After all, this calculation only works if your monthly savings can ultimately exceed your closing costs. Calculations vary depending on how long you plan to continue.
Here’s what to think about when making your decision, according to housing experts.
1. Determine your refinance incentive rate
A rule of thumb in the lending industry is that if mortgage rates drop by at least 0.75 to 1 percentage point, it’s worth refinancing. However, if you plan to stay in your home for a longer period of time, even a small rate reduction may make sense.
Conversely, if your closing costs are high or you expect to move quickly, a 1 percentage point reduction may not be enough. The key is to identify interest rate reductions that will significantly improve your cash flow and advance your long-term financial goals.
“You would only want to take the step if you have sufficient savings,” said Kara Ng, senior economist at Zillow. “Essentially if interest rates are low enough or you’re in your home for a long time. It’s never a bad idea to contact your loan officer and see what your interest rate will be.”
If today’s interest rates don’t add up, don’t immediately cross refinancing off your list. Mortgage rates change all the time, so consider keeping an eye on weekly interest rate movements to identify the best refinance line for you.
2. Check your home equity
Your stock position affects both eligibility and rates. Depending on the type of loan, you may need between 5% and 20% equity to qualify. Borrowers with at least 20% equity typically secure better interest rates and avoid private mortgage insurance, while those with less can face higher costs and additional requirements.
“If you bought it a long time ago at a decline of less than 20% and your equity has increased, you may be able to eliminate mortgage insurance by refinancing,” Ng said.
3. Compare prices
Refinancing closing costs are typically 2% to 6% of the loan amount and may include loan fees, appraisal costs, and title insurance. Some lenders advertise “no closing cost” refinances, but the interest rates are often slightly higher. Make sure you understand what you’re paying upfront and what trade-offs you’ll make.
“Don’t just look at the mortgage rates they offer,” Ng says. “Look at closing costs.”
4. Calculate your break-even point
The break-even point is the amount of time it takes for your monthly savings to exceed the initial cost of refinancing. To find this, divide your total closing costs by your estimated monthly savings. If it takes three years to break even, but you plan on moving in two years, refinancing may not make financial sense. If you don’t want to calculate it yourself, Bankrate’s mortgage refinance break-even point calculator will guide you through it.
5. Choose a loan type based on your goals
You can also reset the clock on your 30-year mortgage to lower your monthly payments, shorten your loan term to pay off your home faster, or leverage your home equity with a cash-out refinance. Ask yourself when making decisions. Do you value paying off your loan faster or lower monthly payments? Each option has different risks and benefits, so tailor your strategy to your broader financial goals.
6. Shop around for lenders.
Mortgage rates and closing fees can vary widely from lender to lender and often change from time to time. While it’s tempting to stick with your current bank or follow your real estate agent’s recommendations, getting quotes from at least a few different sources is the only way to ensure you get the best rate.
Research shows that accepting your first mortgage offer can cost you thousands of dollars over the life of your loan. “Many people rely on just one financial institution,” says Ng. “Please talk to at least two or three people.”
In fact, it’s not uncommon for there to be a one-percentage-point difference between a lender’s direct quote and a competing offer available through Bankrate’s marketplace. By casting a wider net, you increase your chances of finding a lender with pricing that best fits your budget.