Homeowners who can lower their mortgage rates by 1 percent are usually in the best position to refinance. But is it still worth the cost if there is only a 0.5 percent decrease?
The right amount to cut your mortgage rates is not set in stone and it depends on how much you want to pay upfront to keep your rate as low as possible. If you can get your lender to cover your closing costs and still save some, the answer is yes.
Refinancing at 1 Percent
Is a refinancing at 1 percent worth it and if so, how much does it cost you in terms of closing costs and closing fees?
One percent is a significant fall in interest rates and in most cases results in substantial monthly savings, but it is not always worth it.
If you cut your interest rate from 3.75% to 2.75%, you could save up to $250 per month on a $250,000 loan. If you pay off your loan early, you can put your monthly savings toward daily living expenses, emergency funds, investments, or anything! That’s the power of refinancing at a 1 percent lower rate.
1 percent drop in interest rates
Remember, breaking-even on your closing costs is not the only way to determine if a refinance is worth it for you.
Refinancing at 1 percent with no-closing-cost
A no-closing-cost refinance usually means your lender covers your closing costs, but you pay a slightly higher rate of interest. Accepting a higher rate eats up your monthly savings, so you may not be looking forward to it.
Another option might be to include the closing costs of your new loan into the refinance, but your balance and interest paid will increase. For borrowers who want to keep their loans for only a few years, this can be a win-win situation. If you can avoid all these closure costs and still save money month after month, there is nothing to worry about.
Refinancing at 0.5 Percent
Is it worth refinancing at 0.5 percent or will you have to save less per month if interest rates fall? So it takes longer to recover your closing costs and start seeing real benefits. Remember the less your rate drops the less you save each month.
0.5 percent drop in interest rates
If you cut the rate to 3.25% from 3.75%, you could save about $150 a month on a $300,000 home loan. That’s a decent monthly saving, but still not enough for a mortgage with 1.5 percent interest.
Refinancing at 0.5 percent with no-closing-cost
You will be accepting a lower mortgage rate and pay closing costs upfront but you will save money month-to-month in the long run. Paying the closing cost out of pocket is usually the best decision.
Obviously, if you don’t have a lot of savings it makes sense to accept the higher, no-closing-cost rate. Making it easier to see savings every month without having to worry about the initial cost of refinancing.
When to Refinance?
The question of whether you should wait for interest rates to drop lower isn’t the only thing you should think about before refinancing. The benefits can be huge but you’ve got to consider all costs.
A lower rate means you have a lower monthly payment, and that often means you save thousands (perhaps tens of thousands) during the life of the loan. In fact, most people will stay in their homes long enough to pay off their mortgage, even without a 1 percent rate cut.
So make sure the savings you are calculating are realistic, based on the time you plan to keep your mortgage. Make sure your refinancing decision is based on your own credit details and financial goals. I am careful to say that the figures in this article are just an example, so please use them as a guide. Whether the total cost of refinancing makes sense for you depends heavily on how long you want to keep the loan. Still unsure if a refinance is right for you? No need to guess anymore, our online application puts you in contact with our qualified loan officers so you can get the exact answers you need. Takes only 5-minutes to complete with zero obligation to follow through with a refinance. Let Pacific Funding Mortgage Division help you get the home of your dreams in the Santa Clarita valley.