Refinance to Lower Your Interest Rate
- How Much Lower Should My Interest Rate Be When I Refinance My Mortgage?
- A good rule of thumb to follow when refinancing is that the new interest rate should be a minimum of .75% lower than your existing interest rate.
- Breakeven for a Mortgage Refinance
- The breakeven point to recover closing costs when you refinance should be no more than 30 months.
- Mortgage Refinance Example
- Use our MORTGAGE REFINANCE CALCULATOR to determine how much you can save and time to breakeven by refinancing
One of the most common reasons to refinance your mortgage is to lower your interest rate and monthly mortgage payment. A frequent question that borrowers ask is how much lower than my current interest rate should the new interest rate be for me to refinance?
It usually makes sense to refinance if the new interest rate is at least .75% lower than your current interest rate. So if your current interest rate is 5.0%, the new interest rate should be 4.25% or lower. A reduction in interest rate of .75% or more allows you to reduce your monthly mortgage payment and typically recover your refinancing costs in 30 months or less.
Please note that different mortgage programs have different interest rates. For example, the interest rate for an adjustable rate mortgage (ARM) or interest only mortgage is typically lower than the interest rate for a fixed rate mortgage. Each mortgage programs has pros and cons so be sure to weight the positives and negatives of each type of mortgage before switching programs to reduce your interest rate.
The amount of time it takes you to recover your refinancing costs based on the amount of money you save on your new monthly mortgage payment is called the breakeven point. For example, if it costs you $2,000 to refinance your mortgage and you save $100 per month by refinancing, the breakeven point is 20 months. $2,000 in costs ÷ $100 per month = 20 months. You want the breakeven point to be 30 months or less when you refinance your mortgage.
Borrowers should weigh the benefits of a lower mortgage payment against the costs associated with refinancing. Spending a lot on closing costs to lower your monthly payment a small amount does not make financial sense while a larger reduction in your monthly payment that enables you to recover your mortgage costs, or breakeven, in a shorter period of time is beneficial for borrowers.
The example below illustrates how refinancing your mortgage into a lower interest rate can save you money on your monthly mortgage payment. For the example below we are holding the mortgage amount constant and assuming that the borrower pays closing costs but does not pay any discount points. The example demonstrates that by refinancing the borrower is able to reduce his or her monthly mortgage payment by $170 and recover the cost of refinancing in twelve months.
|Current Mortgage||Refinanced Mortgage|
|Term||30 years||30 years|
|Monthly Mortgage Payment||$2,040||$1,870|
|Number of Months to Recover Refinance Costs / Breakeven||12 months|
|Monthly Mortgage Payment Savings||$170|
|Interest Rate Savings||.75%|
|Monthly Mortgage Savings||$170|
|12 months to recover refinance costs|