Why refinance?

Home and money
Watchara Ritjan / Shutterstock

Even if your current home loan is only a year old, it may make sense for you to refinance to a lower rate and reduce your monthly payment.

Research by Freddie Mac shows that homeowners who refinanced last spring — when mortgage rates were higher than they are today — have cut their interest costs by an average $1,700 a year, or around $140 a month.

Refinancing makes sense not only if you can lower your monthly mortgage payment but also if you have a variable-rate mortgage and are able to lock in a low fixed rate.

Adjustable-rate mortgages (ARMs) typically have appealing low rates to start, but after the introductory period ends your interest rate can shoot up depending on the market. With a fixed-rate mortgage, you won’t have to worry about any surprise rate increases.

Use our calculator to see how you might reduce your mortgage payment with the help of today's low rates:

Refi applications up, mortgage rates down

Arrow down and house with money on white wooden background. Falling market price of real estate.
ADragan / Shutterstock

Falling mortgage rates have made refis all the rage, lenders say. During the week ending Jan. 17, refinances accounted for 61.6% or all mortgage applications.

Though demand for refinance mortgages softened a little bit last week, interest among homeowners remains "elevated," according to the Mortgage Bankers Association.

“Refinance applications fell 2% but stayed near their highest level since October,” says Joel Kan, the trade group's vice president of forecasting.

The high volume is directly related to the decline in mortgage rates. Rates on 30-year fixed-rate mortgages fell to three-year lows last year and are headed back in that direction this week, says mortgage company Freddie Mac.

“Rates fell to the lowest level in three months and are about a quarter point above all-time lows,” said Sam Khater, Freddie Mac's chief economist.

Thirty-year fixed-rate mortgages are averaging 3.60%, down from 3.65% a week ago, Freddie Mac reports. The average is the lowest since early October and is closing in on the record-low of 3.31% hit in November 2012.

Rates on 15-year fixed-rate mortgages — which are a popular refinance choice — have slid to an average 3.04%, from 3.09% last week.

More: Take advantage of current low mortgage rates and compare multiple offers instantly.

Things to consider before you refinance

Couple reviewing refinance documents
fizkes / Shutterstock

Although the prospect of slashing your monthly payment through a refinance may be tantalizing, watch out for a couple of special considerations when you're trading in your old mortgage for something new and improved.

The loan term: If you’ve already made 15 years' worth of payments on a 30-year mortgage, refinancing into a new 30-year home loan could wind up costing you tens, or possibly hundreds of thousands of dollars in additional interest charges if you stick with the loan for its full term.

In a case like that, refinancing into a 15-year mortgage would be a far better option; it may lead to a higher monthly payment, but you’ll pay much less interest.

Closing costs: The cost of your new mortgage is another factor that deserves close examination when you refinance. In 2018, borrowers paid mortgage closing costs averaging $5,779, according to the real estate data firm ClosingCorp.

If your monthly interest savings from a refinance are $100 but the closing costs are $5,000, it will take more than four years for you to recoup that expense with your interest savings. And if you’re planning to move before that four year period is up, it will be difficult to make back your closings costs.

The outlook for mortgage rates and housing

Aerial view of tightly packed homes in the Porter Ranch neighborhood of Los Angeles, California.
trekandshoot / Shutterstock

Analysts believe recent drops in mortgage rates have resulted from investors pouring their money into safe-haven investments like U.S. Treasury bonds amid worrisome global issues like the spread of the deadly coronavirus.

Increased demand for Treasuries pushes their prices higher, which causes their yields (interest rates) to droop — and mortgage rates fall right along with them.

The current historically low mortgage rates are likely to stay that way throughout 2020 and 2021, according to a new forecast from Freddie Mac's sister company, Fannie Mae.

But it's important to lock in a good rate when you see one, because mortgage rates can change without warning.

About the Author

Shane Murphy

Shane Murphy


Shane is a reporter for MoneyWise. He holds a bachelor’s degree in English Language & Literature from Western University and is a graduate of the Algonquin College Scriptwriting program.

You May Also Like

This Is How to Find Better Deals When You Shop Online

You're probably paying too much for stuff you buy online.

Do Big Stores Save You the Most? We Price-Check Our Shopping List

With one 30-second trick, we found $460 in savings beyond Walmart and Amazon.

8 Underrated Cities for Millennials in Search of Home Ownership

Don't skip over these smaller, but still bustling, metros.