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Mortgage rates have fallen to all-time lows, and if you're thinking of refinancing, you could put money in your pocket — and your savings account.
The rate on the average 30-year fixed mortgage recently hit 3.29 percent, the lowest since the Federal Home Loan Mortgage Corp., popularly known as Freddie Mac, began surveying rates in 1971. At the same time last year, a 30-year fixed-rate mortgage was 4.41 percent.
Do you remember when mortgage interest rates peaked?
In October 1981, mortgage rates climbed to 18.62 percent
For home buyers, the rate reduction is significant. A $200,000, 30-year mortgage at 3.29 percent would have a monthly principal and interest payment of $1,026, compared with $1,154 a month at 4.41 percent. Monthly savings would be $128 a month, or $1,536 a year.
Rates on other popular mortgages have plunged as well. The 15-year fixed-rate mortgage, for example, fell to 2.79 percent from 3.83 percent a year earlier. The average points paid to lenders to get a discount on the rate was 0.7 percent for both the 30- and 15-year mortgages. For a $100,000 loan, a 0.7 point charge would cost you $700. Without paying points, the discount would disappear and the rate offered by the lender would be slightly higher.
Mortgage rates tend to follow the yield on the 10-year Treasury note, which closed at an all-time low of 0.49 percent on March 9. Although the yield has crept up since then, the full decline hasn't been reflected in mortgage rates, says Greg McBride, chief financial analyst for Bankrate.com. “Mortgage rates have lagged the move in bond yields tremendously,” he says.
The drop in mortgage rates hasn't gone unnoticed, and mortgage processors are bottlenecked, he says: “A lot of lenders aren't putting their best rates out there because they have more applications than they can handle. Some people have gotten yields below 3 percent, but they are hard to find."
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Should I refinance now?
The old rule of thumb for refinancing is that your new mortgage rate should be one percentage point lower than your current one. As with all rules of thumb, however, you need to sit down and do the math first — and assess your personal situation. Why do you want to refinance?
"People refinance for a lot of reasons,” says Keith Gumbinger, vice president of HSH.com, a mortgage information website. “Do you want a lower payment? Do you want to pay off your loan by a certain date?"
If you want to repay your loan by a certain date — say, when you retire — bear in mind that you can simply prepay your existing loan. Prepayments are optional, so you have some flexibility in your monthly payments, which you wouldn't have if you locked into a 15-year mortgage.
If you're simply aiming for a lower rate, be aware that taking out a whole new mortgage can eventually wipe out any savings you make by refinancing. If you have paid off 15 years of a 30-year loan, for example, taking out a new 30-year loan at a lower rate could mean that you ultimately spend more money than you would have otherwise.
How to cut refinancing costs
If you do refinance, you have multiple costs associated with the new loan, from the aforementioned discount points to state property taxes, insurance and appraisals. You can get a good sense of costs by digging out your original loan papers from when you bought the house, Gumbinger says.
Closing costs vary widely from state to state, but fees are typically about 3 to 4 percent of the loan amount. You can pay those out of pocket or roll them into the new loan.
Then, you have to decide if the refinance is worthwhile. Let's say you have a $200,000 mortgage at 4.41 percent, and your bank will give you a new mortgage at 3.29 percent. As noted before, your monthly savings from the refinance would be $128 a month.
If you pay 3 percent total refinancing fees, you'd pay 3 percent of the $200,000 loan, or $6,000. In order to make the refinance worthwhile, you'd need to stay in your home about four years to recoup your costs. If the rate difference between your old loan and your new one is smaller, it will take longer to get back your closing costs.
Similarly, you can recoup your closing costs more quickly if you reduce them as much as possible. One way is to go with a loan with no points. You may not get a 3.29 percent rate and the bragging rights that come with it, but you'll save some money up front. You can also shop around for lower inspection fees and title insurance.
If you're feeling overwhelmed, plenty of mortgage calculators online can help you make your decision. Search “mortgage refinance calculator” and you'll find calculators from Bankrate, Nerdwallet, HSH, Smartasset and others.
Mortgage rates have been low for the past five years, so the rush to refinance may be brief. The highest rate since March 2015 has been 4.94 percent, according to Freddie Mac. Nevertheless, if you can refinance and put some extra money into your pocket -— or your savings account — it could be a good deal. According to Bankrate.com, 77 percent of Americans say the biggest barrier to saving for retirement is making the mortgage payment. “Here's the opportunity to ease that a bit,” McBride says.