Mortgage interest rates have been historically low for nearly a decade now, but surprisingly, those who bought homes just last year could potentially save money by refinancing their loans now.
Since the early 1970s, mortgage loan interest rates have been on a wild ride, peaking above 18 percent in 1981 and falling below 4 percent after the Great Recession, with plenty of dips and spikes along the way.
At the start of this year, economists were predicting that mortgage interest rates would rise, heading toward 5.5 percent. Instead, they have fallen.
Last year, 30-year mortgage rate nearly hit 5 percent, which would have been the highest since February 2011. The average 30-year interest rate was at least 4.5 percent from April through December 2018 and approached 5 percent in October and November, according to Freddie Mac.
This week, the average 30-year rate was 3.6 percent, Freddie Mac reported, and that's the lowest average interest rate seen on home loans since the fall of 2016. That's great news for potential homebuyers, and an opportunity for those who have mortgages.
What does that mean for you, if you're a homeowner? It means you could potentially save money every month as long as you have a mortgage, if you refinance.
There are some guidelines about refinancing. Some say it makes sense if you can get an interest rate 2% lower than your current loan. Some say a 1% difference in the interest rate is enough.
The way to know for sure is to do the math, and part of the answer will depend on how long you plan to live in the mortgaged property. The longer you expect to live in your home, paying a mortgage, the greater the long-term savings from refinancing.
Basic questions to answer are:
- What is your current interest rate, what interest rate could you refinance at, and how would that change your monthly payment? Online mortgage calculators can help.
For a loan with a current rate of 4.6 percent, refinancing at 3.6 percent would reduce the monthly payment on a 30-year, $200,000 loan from $1,025 to $909. That's a savings of $1,392 yearly.
- What would it cost to refinance? Expect to pay for an appraisal, title search, and lender fees — costs that are often included in a refinanced mortgage loan.
- How long would it take for the savings from a new, lower mortgage payment to pay you back for the cost of refinancing? The answer will help determine if refinancing makes sense.
The cost of refinancing is an important part of the equation, and costs can vary greatly from one lender to another, so shop around. Consider local banks, credit unions, mortgage brokers and online banks.
If your original mortgage was originated within the past 12 months, check with your lender and see if they would recast or refinance the loan at low cost.
Remember also that if you refinance at a lower interest rate, a larger portion of your mortgage payments will be applied to reducing the loan balance and building up equity.
Using my earlier example of $200,000 refinanced from 4.6 percent to 3.6 percent, after five years of making lower payments not only would the borrower have saved money each month, but their home equity would have increased by $2,889.
Looking ahead, will mortgage rates rise or fall? I don't know the answer, but I do know that since 1971 the average 30-year mortgage interest rate has never dropped below 3 percent.