Refinancing your mortgage down a half-point might make sense in some cases, but not in all cases. Getty Images
Mortgage rates have plummeted to below 3% during the pandemic, but some homeowners were unable to lock in low rates at the time. But with many expecting the Federal Reserve to start cutting the federal funds rate this year, homeowners may start to see relief.
Still, most expect the Fed to cut rates only moderately, and it's unclear if or when it will actually do so. Meanwhile, mortgage rates have been fluctuating somewhat in recent months, rising above 7% in April and May but are now down to 6.86% for the average 30-year fixed-rate mortgage, according to Freddie Mac.
Amid these changes and the hopes of lower interest rates, some homeowners may be wondering whether refinancing is still worth it, even if mortgage rates drop slightly. Specifically, is it worth refinancing your mortgage to get a half-percentage point lower interest rate?
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Is it worth lowering your mortgage refinance rate by 0.5 percentage points? Experts weigh in
Here's what real estate experts say about whether it makes sense to refinance your mortgage to a half-percentage point lower.
Yes, it's worth lowering your mortgage refinance rate by half a percentage point
In some cases, it might make sense from a financial perspective to refinance your mortgage by half a percent, but you also need to calculate whether you'll stay in the property long enough to overcome the upfront costs.
“For a $200,000 loan, the difference in monthly payments between a 7% and 6.5% interest rate is $67. The savings are beneficial, but you need to factor in refinancing costs depending on the expected term of the property. If the refinance cost is $2,500, it would take about 37 months to recoup that cost because of the reduced monthly payment,” says Jerry Coors, president of Merchants Mortgage at Merchants Bank.
Refinancing at a 50 basis points lower interest rate might make sense if it helps you improve your loan terms.
“Refinancing to lower your interest rate by a half-point can be advantageous, but it's not just about lower rates,” says Jim Breeze, senior vice president of mortgage product development at PNC Bank.
“For example, if you have an adjustable-rate mortgage and interest rates are about to rise, it may be advantageous to switch to a fixed rate. If you want more stability in your payments, refinancing to a fixed rate could also be a good idea,” he added.
You could also refinance to get a more affordable monthly payment, even if it means extending the loan term, Brees says.
Another factor is refinancing to eliminate private mortgage insurance (PMI), which could further reduce your monthly payment, Koors says, though refinancing isn't the only way to remove PMI from your current loan.
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No, lowering your mortgage refinance rate by 0.5 percent isn't worth it
While it may make sense to refinance your mortgage to a half-percentage point lower interest rate, there are also cases where it just isn't worth it, especially when you factor in closing costs.
“I don't think a half-percentage-point mortgage refinance is worth it. When you factor in closing costs that can be 2% to 5% of the new loan, I wouldn't recommend refinancing unless the interest rate can be reduced by at least 0.75%,” says Dottie Herman, vice chairman and former CEO of Douglas Elliman Real Estate.
Even if you don’t have to pay these settlement costs right away, they could increase the total amount of your mortgage.
“To avoid paying the upfront fees, some borrowers choose to roll the fees into the new loan amount, which increases their payments and restarts interest on the 30-year loan,” Cools says.
And if you don't plan on living in your current home for any time, the math for refinancing becomes harder to justify.
“For example, if it costs you $2,000 to refinance and reduces your monthly payments by $200, it will take you 10 months to pay off. If you plan on moving within six months, it may not be worth it to refinance. Your best bet is to talk to your loan officer to explore your options,” Breeze says.
Conclusion
Mortgage refinancing interest rates shouldn't be the only factor in why you might refinance, and interest rates don't necessarily have to drop significantly to justify the cost of refinancing. However, it's important to calculate your total costs, compare your options, and see if refinancing at a half-percentage point lower interest rate could improve your financial situation. Sometimes the math makes sense, but sometimes you decide to wait until interest rates can potentially fall even further.