Money doesn’t grow on trees, and most people work very hard for what they have. To help save money, many people use budgets, clip coupons, only buy new when things are on sale, and shop at thrift stores and flea markets. Money saved is money earned, right?
But there’s a way to potentially save a lot of money that is often overlooked – refinancing your mortgage when interest rates go down. Depending on the amount of the mortgage and the terms, the savings could be significant. Refinancing when mortgage interest rates drop one or two points could result in thousands of dollars in savings over the life of your loan.
It’s worth checking with your lender to see if you could save money by refinancing your mortgage.
How Are Mortgage Refinance Rates Determined?
Interest rates are constantly in motion, and to understand how refinancing can save you money, it’s worth taking a look at how rates are determined.
Interest is the money that is paid to a lender for the money you borrow. When you make your monthly payments on your mortgage, part of the payment goes towards repaying the principal of the loan while the rest goes towards the interest.
The amount you pay in interest for your loan is primarily determined by the current interest rate when you took out your mortgage. Mortgage refinance rates are largely influenced by Fannie Mae and Freddie Mac, which are large financial institutions that buy mortgages and then resell them to investors.
Additional factors that can influence your mortgage interest rate include:
Your credit score
Loan amount
The local housing market
The size of your down payment
Length of the loan
Whether you choose a loan with a fixed or adjustable-rate
How Does Refinancing Save You Money?
Refinancing an existing mortgage can save you money in one of three ways:
Lowering your monthly payments
Repaying your loan in less time
Reducing the total interest you will pay on the loan
When you apply to refinance your mortgage, be sure to mention your goal to your lender to make sure you get the best mortgage for your needs.
1. Lowering your monthly payments
When mortgage refinance rates go down, it may be possible to structure a new loan with lower monthly payments. The equity you have in your home and other factors will be important considerations in the length of the new loan. Even with a lower interest rate, you may have to go with a mortgage with a longer term to achieve your desired monthly payment.
2. Repaying your loan in less time
Reducing the time it takes to repay a loan can be accomplished by structuring a new loan with shorter terms, making additional payments on your new loan, or both.
If you have a 30-year mortgage, for example, you could refinance into a new 15 or 20-year mortgage to repay the remaining principal in less time. With this option, you may end up with higher monthly payments. It depends on a variety of factors like how much equity you have when you refinance, the new interest rate, and other things.
If you refinance when interest rates are low with a new loan that gives you lower monthly payments, you may be able to save money to make additional payments. Extra payments on the principal of your loan will help you pay your loan off faster.
3. Reducing the total interest you pay on your loan
Decreasing how much interest you pay over the life of your loan is another way you may be able to save by refinancing. The longer your loan is, the more you will have to pay in interest.
Refinancing to a loan with a shorter term can result in significant savings. You can use our Mortgage Refinance Calculator to get a general idea of how much you can save with different terms.
To give you a general idea of what’s possible, consider the following loan:
Loan amount: $300,000
Term: 30 years
Interest rate: 4.0%
If you plug this information into a mortgage refinance calculator, it shows that you will be paying $215,608.52 in interest over the life of the loan.
If you change the term to a 15-year loan, however, you will be paying $99,431.48 in interest. That’s a savings of over $115,000.
When Should You Consider Refinancing?
As a general rule of thumb, it’s worth checking with your lender to see if refinancing could result in savings if mortgage interest rates drop at least 1%. Everyone’s loan situation is unique, however, and many variables go into determining whether refinancing will result in savings. The 1% rule of thumb is not written in stone, and in some cases, it may be worth refinancing if the rate falls less than 1%.
An important thing to consider if you are thinking about refinancing is the closing costs of your new loan. Closing costs vary but are typically between 3-6% of the principal of the loan.
See How Much You Can Save With A Mortgage Refinance Calculator
If you are thinking about refinancing, a mortgage refinance calculator can give you a general idea of how much you can save with the current interest rate. In the calculator, you can make adjustments to the loan term to see how much you can save on interest and to see what your monthly payments will be.
Mortgage Refinance Calculator
Learn more about Listerhill's mortgage refinancing options
