when is it worth to refinance

Question

Currently have a 6.99 rate on primary residence.  Still have 28 years left on loan.  How low do interest rates need to fall before refinancing becomes smart?  This is my primary residence, so I’m actually paying the mortgage and interest.

Jay Hurst · Answer

It depends on the size of the loan and how long you plan on owning the home. The "payback" period is what matters.

Closing costs are mostly just a flat number meaning the fee is the same if it is a 100k loan or a 1 mm loan.  So, on the lower end of the price range the rates might have to drop 2% to make sense for the monthly savings to pay back the one-time costs with a payback period that makes sense for you where the rate might only have to drop .250% on a very large loan. So, people will certainly provide a "rule of thumb" for a rate drop but those rules are not correct.

Patrick Roberts · Answer

@Jay Hurst is spot on. The payback period is the primary consideration. A payback period under two years is generally decent, and under 12-15 months is usually a good idea.

A couple other things:

- a "no cost refi" isnt a real thing. There is always a cost. Typically, lenders bait and switch this in one of two ways: either offering you a rate over par so that you get a lender credit to pay for the closing costs, or by rolling the closing costs into the loan. If the lender is giving you a lender credit, then you could likely receive an even lower rate by just paying the closing costs directly. You need to find out what this amount is - it may be worth it to pay the closing costs, obtain the lowest rate possible, and then let the loan ride for a while; or may make sense to take the lender credit and see what the market does over the next few years to hedge your risk. This all depends on your goals and strategy.

- Attorney costs: typically, when lenders advertise a "no closing costs" refi, they are referring to lender costs. You will likely still have to pay an attorney/title company for the closing

- Loan type/MI/PMI: if the refi gets rid of/drops the monthly mortgage insurance, then this should be an added consideration. Also, if the new loan is an FHA, you will have to pay UFMIP.

- Loan term: Most lenders quote 30yr FRM and calculate the payback period based on the difference in monthly payment, not the difference in interest costs. I would base the breakeven on the net interest difference between the two loans.

- Unless there is a major difference in the rates between a 15yr and 30yr, I would opt for a 30yr term regardless of how long you have remaining on your current loan. You can always pay your loan on a faster amortization to turn a 30yr loan into 15yr and save on aggregate interest costs, but you cannot pay less than the minimum each month to turn a 15yr loan into a 30yr. This will mitigate your cashflow risk in the event that something crazy happens unexpectedly in the future.

Mohammed Rahman · Answer

Rule of thumb: refinancing usually makes sense when you can drop your rate by about 1% or more, and you plan to stay in the home long enough to cover the closing costs with the monthly savings.

For you, at 6.99% with 28 years left, if rates fall into the mid-5s (say 5.75% or lower), it’s worth running numbers. That kind of drop would shave a noticeable chunk off your monthly payment and interest over the life of the loan. If rates get into the 4s, it’s almost a no-brainer.

The other big factor is time horizon. If you plan to move or sell in just a few years, the savings may not offset the closing costs. But if you’ll be there 7+ years, even a 0.75% drop could be worth it.

J Castro · Answer

Hey @Carlos Silva welcome to BP!It's worth refinancing a mortgage when the total cost of refinancing is offset by the potential savings, typically achieved by lowering your interest rate (by at least 0.50% to 1%) or by changing to a more suitable loan term or type. Refinancing makes sense if it helps you reduce your monthly payments, shorten your loan term, switch from an adjustable-rate to a fixed-rate mortgage, or access your home equity for major expenses like renovations or debt consolidation.

An important factor to keep in mind, your personal finances are often more influential than broader economic factors in determining your final rate when refinancing. Before you apply, you should consider taking these steps to position yourself as a low-risk borrower and qualify for the lowest rates...      - Improve your credit score. A higher credit score signals a track record of responsible debt management, and lenders typically offer their lowest rates to borrowers with a score of 740 or higher.       - Lower your debt-to-income (DTI) ratio. Your DTI is the percentage of your gross monthly income that goes toward debt payments. Lenders see a lower DTI as an indication that you can comfortably manage your monthly payments. The best rates are often reserved for those with a DTI of 36% or lower.      - Increase your home equity. A larger down payment or significant home appreciation results in a lower loan-to-value (LTV) ratio, which reduces the lender's risk. Refinancing with 20% or more equity can help you secure better rates and eliminate Private Mortgage Insurance (PMI).

If you feel that you have all of the above under control and in order, than you are ready to  start shopping. You can start by requesting Loan Estimates, which detail the full cost of the loan, from interest rates to closing costs. Get quotes from at least three to five lenders to use as leverage for negotiation. This allows you to compare interest rates, fees, and overall costs. While the interest rate shows the cost of borrowing, the APR includes the interest plus other fees, like origination charges. A loan with a slightly lower interest rate but high fees may actually have a higher APR than a competitor. When finalizing the loan, these considerations will help you structure the loan for the lowest possible long-term cost.

- Calculate your break-even point. Refinancing requires you to pay closing costs, which typically range from 2% to 6% of the loan amount. Your break-even point is when your monthly savings exceed these costs. If you plan to sell your home before you reach this point, refinancing may not be worth it.      - Consider buying discount points. You can pay an upfront fee (1% of the loan amount per point) in exchange for a permanently lower interest rate. This is most beneficial if you plan to stay in the home long enough to recoup the cost of the points.      - Evaluate the loan term. Shorter loan terms, such as a 15-year fixed-rate mortgage, typically come with lower interest rates than a 30-year term. While this can save you significant interest over time, it also results in a higher monthly payment.      - Choose between fixed-rate and adjustable-rate. A fixed-rate mortgage offers stable payments and is generally a safer bet when current rates are low. Adjustable-rate mortgages (ARMs) can have lower introductory rates, but they carry the risk of future rate increases.      - Lock in your rate. Once you have an attractive offer, a rate lock protects you from market fluctuations during the closing process. Depending on the lender, this can last for 15 to 60 days and may involve a fee.

These are just a few factors for you to consider when thinking to refinance. Again everyone objective to refinance may vary/differ, just as their current circumstances - so you will need to make your best judgement based on your end goal.

Bobby Paquette · Answer

What's your goal with the refi? I'm refi'ing one right now after only having it for a 14 months, because I can pull some money out and likely get 2 more houses.

Jeff S. · Answer

The Mortgage Professor is a reliable website for all mortgage-related questions. The articles are well-written, and he provides a wide selection of calculators, including several that address refinancing. Here’s the link: Find a Refinance Calculator.

Bill B. · Answer

I would check the rates on a 15 year loan. If those payments are comfortable you’ll save the most interest and get a lower rate. Otherwise you’ll be extending your loan back to 30 years. (Some lenders will brag about lowering your payment forgetting to tell you that there are 24 more of them in your case.)

The PMI would be the other big saver if you’re paying it now and can get out of it. If it’s close put some more money down and consider the PMI savings as an investment return on your extra investment. But the 15 year shoudl save you at least 1/2 a point. Good luck.

Derek Brickley · Answer

Good question, and this leads to the concept of a net tangible benefit.

Is this a conventional loan, VA, FHA, or other? Certain types of loans have the benefit of streamline refinances not requiring an appraisal to make the refinance easier for you.

If you have a $100k loan, then it's likely never going to make sense unless rate dropped to like 4.99% or lower.  If it's a $2M loan, then a 6.75% rate could make a huge difference.

Also how much equity do you have in the home compared to when you purchased it? If you bought the home putting 5% down but now have 20%+ in equity, in the process of refinancing it's easy to drop any mortgage insurance.  If your equity has increased but you're not to that 20% threshold yet, you can in the process of your refinance still eliminate the monthly mortgage insurance by rolling certain closing costs into the loan (this is very situational not recommended for everyone)

Most of the time you can time it so you don't make 1 sometimes 2 mortgage payments when you refinance and if you have the equity can get up to $2k back at closing without it being considered a 'cash out' refinance.  Then anything in your current escrow account will be refunded to you in the mail by check within 30 days.

when is it worth to refinance

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