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Refinance to Lower Your Mortgage Rate

Refinance to Lower Your Mortgage Rate

  • How Much Lower Should My Mortgage Rate Be When I Refinance?
  • One of the most common reasons to refinance your mortgage is to lower your interest rate and monthly payment.  Reducing your mortgage rate usually enables you to save money on your monthly payment as soon as your refinance closes.  Although it seems like an easy decision, there are closing costs and other expenses that borrowers should keep in mind.  The costs of refinancing may outweigh the financial benefits depending on how much you are able to lower your mortgage rate.  A frequent question that borrowers ask is how much lower should my new mortgage rate be for me to refinance?  Or in other words how much lower should my monthly payment be to justify the expense that may be associated with refinancing?

    In short, it usually makes sense to refinance your mortgage if your new mortgage rate is at least .750% lower than your current rate.  So if are currently paying 5.000%, your new mortgage rate should be 4.250% or lower.  A reduction of .750% or more allows you to reduce your monthly mortgage payment and typically recover your refinancing costs in 30 months or less.  If you reduce your mortgage rate by less than .750%, you still lower your monthly payment but it may take you a long period of time to recover your closing costs, so it may make less sense to refinance.

  • CalculatorUse our MORTGAGE REFINANCE CALCULATOR to determine how much you can save by refinancing
  • Closing costs also play a very important role in determining if you should refinance your mortgage. If you pay little or no closing costs, then refinancing usually provides a financial benefit even if you only lower your mortgage rate by a small amount. For example, if you reduce your mortgage rate and lower your monthly payment by $50 without paying closing costs, then refinancing is a sound decision because you can save money without bearing significant financial expense.  It is important to highlight that a no cost refinancing usually charges the borrower a higher rate than if you pay regular closing costs so you should always weigh the trade-off between mortgage rate and closing costs when deciding if you should refinance. 

  • Great Mortgage IdeaA good rule of thumb to follow when refinancing is that the your mortgage rate should be a minimum of .750% lower than your current rate. Refinancing may also make sense if you can lower your monthly payment and pay little or no closing costs
  • Another point to highlight is that different mortgage programs have different interest rates. For example, the rate for an adjustable rate mortgage (ARM) or interest only mortgage is typically lower than the rate for a fixed rate loan. But ARMs and interest only loans involve more risk than a fixed rate mortgage because your monthly payment can potentially increase significantly in the future.  So you may be able to lower your mortgage rate and payment in the near term but you may not be able to afford the loan in the long term.  Borrowers should weigh the positives and negatives for each type of loan before switching programs to simply reduce your mortgage rate or payment.  Short term savings may end up costing you much more over the course of your loan.

    The table below compares refinance rates and fees for leading lenders in your area.  We recommend that you contact multiple lenders in the table and request refinance proposals including loan terms.  Shopping lenders is the best way to save money when you refinance. 

  • Rate Details*
    Loan Program:  
    Monthly Payment:  
    Points  More Info:
    Points: Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
    Total Lender Fees:  
    Loan type:  
    Property Value:  
    Loan to Value:  
    Credit Rating:  
    Date Submitted:  
    Monthly Housing Payments
    P & I More Info
    Principal & Interest: A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to the reduction of the principal balance.
    Mortgage Insurance More Info
    Mortgage Insurance: The monthly cost for a policy that protects the lender in case you’re unable to repay the full amount of the loan. It is typically required for loans that have a loan-to-value ratio between 80% to 100%.
    Property Tax More Info
    Property Tax: (Also called "Real Estate Tax.") Property taxes are government assessments on real estate property. With mortgage financing, the local, county or state tax assessment on real estate property is considered part of the monthly housing obligation and typically collected and set aside by the lender ...
    Homeowner Insurance More Info
    Homeowner Insurance: or also commonly called hazard insurance, is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of its use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.lender ...
    Homeowner Association Fee More Info
    Homeowner Association fee: (HOA) fees are funds that are collected from homeowners in a condominium complex to obtain the income needed to pay (typically) for master insurance, exterior and interior (as appropriate) maintenance, landscaping, water, sewer, and garbage costs.
    (If Any)
    Total Monthly Housing Payments
    Lender Fees
    Points More Info
    Points Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
    Origination Fee More Info
    Origination Charge: A loan origination charge is a fee charged by the lender for evaluating, processing, and closing the loan.
    Credit Report Fee More Info
    Credit Report Fee: Fee charged to obtain an applicant’s credit history prepared by one or all of the three major credit bureaus. Used by lender to determine the borrower’s creditworthiness.
    Tax Service Fee More Info
    Tax Service Fee: A fee charged by the lender to cover the cost of retaining a tax service agency. These agencies monitor the property tax payments on the property and report the results to the lender.
    Processing Fee More Info
    Processing Fee: A processing fee is a charge by the lender for clerical items associated with the loan. Examples of processing include loan set up, organization of loan conditions for underwriting, and preparing required disclosures for the borrower.
    Underwriting Fee More Info
    Underwriting Fee: A fee charged by the lender to verify information on the loan application, authenticate the property’s value, and perform a risk analysis on the overall loan package.
    Wire Transfer Fee More Info
    Wire Transfer Fee: In most cases lenders wire funds to escrow companies to fund a loan. Commercial banks that perform this function will charge the lender so the fee is generally passed on to the borrower.
    (If Any)
    FHA Upfront Premium More Info
    FHA Upfront Premium: A fee paid in cash at the close of escrow or more commonly it is financed into the loan. These premiums are pooled together by the FHA and are used to insure the risk of borrower default on FHA loans. FHA upfront premiums are prorated over a five year period, meaning should the homeowner refinance or sell during the first five years of the loan, they are entitled to a partial refund of the FHA upfront premium paid at loan inception.
    (If any)
    VA funding Fee (If any)
    Flood Fee
    Other Fees More Info

    Other fees could be either additional Administrative Fees that a lender charges or it could be a Flat Fee to cover all lender charges such as: (Origination Fees, Points, Underwriting and Processing Fees, Credit Reports and Tax Service Fees)

    The flat fee does not include prepaid items and third party costs such as appraisal fees, recording fees, prepaid interest, property & transfer taxes, homeowners insurance, borrower’s attorney’s fees, private mortgage insurance premiums (if applicable), survey costs, title insurance and related services.

    Total Lender Fees
    *Actual rates and other information may vary. Sponsored results shown only include participating lenders. The information you enter on this page will only be shared with lenders you choose to contact, either by calling the phone number or requesting a quote.
    Current Mortgage Refinance Rates as of December 13, 2018
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    Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click here for more information on rates and product details.
  • Breakeven When You Refinance Your Mortgage
  • As referenced above, in addition to your mortgage rate, borrowers also need to factor closing costs into their refinance decision. The best way to think about closing costs is to determine how long it takes your mortgage to pay you back if you refinance. You may be able to lower your mortgage payment but if it takes you ten years to recover your closing costs, then refinancing may not be the right option, especially if you plan on selling your home or paying off your loan before ten years.

    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.

  • Great Mortgage IdeaThe breakeven point to recover closing costs when you refinance your mortgage should be no more than 30 months
  • 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 closing costs, or breakeven, in a shorter period of time, is beneficial for borrowers.

  • Mortgage Refinance Example
  • The example below illustrates how refinancing to lower your mortgage rate can save you money on your monthly payment.  For the example below we hold the mortgage amount constant and assume that the borrower pays closing costs but does not pay any discount points.  By refinancing, the borrower reduces his or her mortgage rate by .750% and monthly payment by $170 per month.  Assuming $1,875 in closing costs, which is relatively typical for a mortgage of this size, the borrower recovers the refinance closing costs in twelve months.

    This example demonstrates both rules of thumb when it comes to refinancing your mortgage. The borrower was able to lower his or her mortgage rate by at least .750% and recover refinance costs in less than 30 months. In this case, it definitely makes financial sense for the borrower to refinance.  The more you can lower your mortgage rate, the faster your time to breakeven and the greater the financial benefit you realize by refinancing.

  • Refinance Your Mortgage to Lower Your Interest Rate
    Current Mortgage Refinanced Mortgage
    Mortgage Amount $380,000 $380,000
    Interest Rate 5.0% 4.25%
    Term 30 years 30 years
    Monthly Mortgage Payment $2,040 $1,870
    Refinance Costs null $1,875
    Number of Months to Recover Refinance Costs / Breakeven 12 months

    Savings Analysis

    Monthly Mortgage Payment Savings $170
    Interest Rate Savings .75%
    ÷ =
    Refinance Costs $1,875
    Monthly Mortgage Savings $170
    12 months to recover refinance costs
  • Use our free mortgage quote form to compare no obligation quotes from top-rated refinance lenders. Our quote form is personalized, easy-to-use and does not impact your credit. Comparing mortgage quotes enables you to find the best loan terms.

  • Sources

    Mortgage Refinance:

About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry


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