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By Joshua Rodriguez
Edited By Angelica Leicht
/ CBS News
Today's mortgage rates are quite a bit higher than therates that hovered near 3% in late 2020 and early 2021. But they're also not as elevated as they were in the final quarter of 2023. So, depending on when you purchased your home, you may be wondering if now is a good time to refinance.
After all, if you purchased your home when mortgage rates were elevated last year, refinancing now could lead to meaningful savings. On the other hand, there are costs involved with a mortgage refinancerelated to the appraisal, application, loan origination and more. Considering these costs, how much do mortgage rates need to drop to make refinancing worth it?
Compare your mortgage refinancing options now.
How much does mortgage interest need to drop to make refinancing worth it?
"This is the million dollar question, and it's not the same for everyone," says Earl Dell, SVP of national retail sales and acquisitions at Mutual of Omaha Mortgage. "A lot of this goes into what your current mortgage balance is at this time, and how long you plan to stay in your home."
For example, let's say you owe $250,000 on your home with a 30-year mortgage at 8.35%. You could refinance your home with a new 30-year mortgage with a lower interest rateof 7.25%, but doing so comes with fees that range, on average, from 3% to 5%. If we're assuming 3%, that would equal about $7,500 in fees.
At the current rate of 8.35%, you would pay $432,477 in interest in total over the life of your mortgage loan. However, if you refinance your home with a 30-year loan at a 7.25% interest, you would pay a total of $363,959 in interest over the life of the loan. And, after accounting for the $7,500 in fees, refinancing would result in a total savings of $61,018 in interest over the life of your mortgage.
If you have a mortgage with a higher balance and rate, a drop of 0.5% interest could be worth refinancing, according to Dell. "For a lower balance, rate and term refinance, it may be at least 1% or more to be worth your time and money," Dell says.
It's also important to consider how long you plan on living in the home. "If you plan on moving in the next two years, I would hold off from refinancing," Dell says.
Find out how much you could save by refinancing your mortgage today.
Is refinancing worth it at a higher interest rate?
If your current mortgage rate is lower than today's rates, there may be no long-term interestsavings when you refinance. However, mortgage refinancing may still be worth considering in certain cases. For example, you could refinance from a 30-year loan term to a 15-year loan term at a slightly higher rate to pay off your mortgage loan quickly. Or, you could usecash-out refinanceat a slightly higher rate to pay off high-interest debt if a home equity loan isn't an option.
Tap into your home equity with a cash-out refinance now.
The bottom line
There are numerous factors to consider before refinancing your loan— but your new mortgage rate plays a large part in whether or not it makes sense to do so. And, while a 1% drop in mortgage rates nearly always makes sense to consider, in certain cases, even a slight drop in mortgage rates could make refinancing worth it — especially if you plan to stay in your home for the long term. Before you make any decisions, though, just make sure to understand the short- and long-term implications of refinancing your mortgage loan to ensure that it's the right move for you.
