- The 30-year average fixed mortgage rate fell 0.11% to 2.98% this week
- The 30-year average fixed mortgage rate fell below 3% for the first time in weeks
- The 0.11% drop is the biggest weekly drop in 12 months
- This drop in rates could signal new refinancing opportunities
The 30-year average fixed mortgage rate fell from 0.11% to 2.98% this week, the first time it has fallen below 3% in more than a month, according to a Freddie Mac Rate Survey.
It has been 12 months since we have seen such a large weekly drop in mortgage rates. This lower rate is a boon for homeowners who expect a better refinancing rate.
This week’s drop runs counter to the slow rising trend in mortgage interest rates, which we saw before the Federal Reserve announcement that he would begin to unwind his pandemic-era policies that helped keep rates low. However, don’t expect a sustained drop in rates over the next few months, as many experts expect mortgage rates to rise towards the end of 2021.
Over the past 18 months, borrowers have had access to historically low mortgage rates. If you haven’t taken advantage of these rates, the refinancing or foreclosure window for an exceptional interest rate is still open. But before you refinance, you’ll want to take a step back and make sure it’s the next step that’s right for you and your goals.
Here are three questions to ask yourself before committing to mortgage refinancing.
3 questions to ask yourself before refinancing
Overall, now is a good time to refinance considering how low the interest rates are. But refinancing isn’t just about the interest rate.
1. What are your goals?
Refinancing is just one tool that can be used to help you reach your financial goals. It’s important to understand what you want to accomplish before you start comparing mortgage lenders or analyzing different types of loans.
Depending on your financial goal, choosing the right type of refinance loan that best matches your goal is essential. For example, interest rate and term refinancing can lower your monthly housing costs. You can then use the freed funds to pay off the credit card debt. But a cash refinance could be used to finance a home upgrade. Knowing what is most important to you and your goals can help you make the right decision.
2. Is it worth the cost?
Refinancing isn’t free, so the decision isn’t always as simple as looking at your current interest rate and seeing if you can get a better rate. There are upfront closing costs that need to be factored in. They range from 3% to 6% of the loan balance. To help homeowners decide whether refinancing is a good decision or not, a good rule of thumb is: if you can lower your interest rate by 1% or more, then you could see significant benefits.
Here is an example of a homeowner who bought a home for $ 400,000 with a 5% down payment four years ago (remaining balance of $ 350,919). Assuming an interest rate of 4% on a 30-year loan, here’s what the savings would look like by reducing the rate by 1% on a new 30-year refinance loan.
|Amount of the loan||Interest rate||Monthly payment of principal and interest||Remaining interests|
|Loan in progress||$ 350,919||4%||$ 1,814||$ 213,359|
|Refinancing loan||$ 350,919||3%||$ 1,479||$ 181,806|
|Difference||–||1%||$ 335||$ 31,553|
If there is $ 12,000 in closing costs, it will take about three years for the $ 335 in monthly savings to offset the upfront costs. How long you plan to stay in the home before selling, or possibly refinancing again, should be factored into your decision.
Interest paid over the remaining term of the loan would drop by over $ 30,000 with refinancing, but this homeowner would add four years to their mortgage by taking out a new 30-year mortgage. You could also reduce your repayment term with a shorter 20-year loan or a 15-year loan, but that would increase your monthly payment. So it’s a compromise.
3. Is refinancing the best way to reach your goals?
Refinancing may not be the best strategy to achieve your goals, nor is it an option for all homeowners.
Instead of taking out a cash refinance loan, you can open a Home Equity Line of Credit (HELOC). In this scenario, you will keep your current mortgage and open a line of credit secured by your home. As with any loan option, there are pros and cons to consider. For example, with a HELOC, you only pay interest on what you spend. With a refinance with withdrawal, you pay interest on the full amount from day one.
If you want to reduce the total interest you pay, you can increase your monthly payments and pay off your mortgage sooner. This method reduces the overall interest paid and gives you more flexibility if you experience an unexpected loss of income without involving refinancing or closing costs.