After years of historic lows that eventually dipped below 3 percent, average mortgage rates more than doubled from late 2021 to late 2023, when inflation erupted like a long-dormant volcano waking up. Last year mortgage refinance rates began to dip again, and while most forecasts don’t herald a return to low single digits, mortgage refinancing, even in an unsettled market, offers homeowners numerous opportunities for financial benefit. Maybe you could benefit from exploring the cost to refinance mortgage loans.
What is mortgage refinancing?
Simply stated, mortgage refinancing originates a new home loan. It may replace an existing mortgage for such financial advantages as quicker payoff or lower monthly payments. Another major purpose for refinancing is to replace an adjustable-rate mortgage (ARM) with a fixed-rate mortgage. In a totally different direction, a refinancing effort may acquire a second mortgage (or another primary mortgage) to provide access to home equity.
Benefits of refinancing
Let’s consider why such benefits matter.
Quicker payoffs (shorter terms) are one obvious reason to explore mortgage refinance rates for your home. When rates have come down since your original (or most recent) mortgage was created, going from a 30-year term to a 15-year term could provide far greater flexibility in planning your retirement or acquiring other investments at the mortgage’s end.
You may prefer to translate lower interest rates into lower monthly payments instead, depending on your particular needs and goals. Let’s say you bought a home in the spring of 2024 with a $500,000 mortgage at a 7.25 annual percentage rate (APR). By that fall you might have found another mortgage available at 6.625 APR–a little over half a percentage point lower. But a small difference in mortgage refinance rates can equal big savings: That dip in interest rate, even after including $4,000 in closing costs, could save you over $225,000 over the lifetime of your home’s loan. It’s easy to find an online mortgage calculator that lets you experiment with different loan amounts, terms, available interest rates, and other factors to see when refinancing could really pay off for you.
Another reason many people may look at refinancing is to shift from an Adjustable Rate Mortgage (ARM) to a mortgage with a fixed rate. ARMs usually offer low initial rates, allowing some borrowers to get into home ownership who might not otherwise qualify, or enabling them to buy more house than a fixed rate would provide at the time. For some, having the possibility of rising rates (and thus rising payments) hanging over their head is disquieting, and being able to lock in a fixed rate provides them with peace of mind.
Access to home equity
Refinancing to get access to home equity may be useful for reasons beyond mortgage refinance rates. Such refinancing may come as a new mortgage entirely or a second mortgage in addition to the primary loan.
A third option is a Home Equity Line of Credit (HELOC), which acts as a pre-approved loan from which you can borrow up to a set amount–typically 85 percent of your equity, minus the principal owed on any other mortgages. For example, if your home is worth $600,000 and you owe $350,000 on its primary mortgage, your equity is $250,000. With 15 percent of your home’s value ($90,000) held in reserve, a HELOC would enable you to borrow up to $160,000.
Any of those instruments can provide equity-funded money for a host of priorities:
- Home improvements: When you use a mortgage or HELOC to pay for residential upgrades, additions, or repairs, the interest is likely lower than for unsecured sources of credit and may be deductible from state and federal income taxes. There’s an added bonus in using your home’s equity to further enhance both your enjoyment of the home and its market value.
- Emergency funds: Having readily accessible monies to pay for unexpected repairs, sudden healthcare needs, and other urgencies may be a stress reducer for many homeowners.
- Debt consolidation: The average American household owes more than $6,000 in credit card debt, for which annual interest rates can soar past 30 percent. Add high-interest car loans and other consumer debt, and it’s obvious how transferring such debts to a HELOC at a fraction of the interest rate could be a financial lifeline.
- School expenses: A HELOC may provide a lower rate for tuition, housing, books, and other costs of education than private-sector student loans.
- “Bucket list” purchases: Looking to take an extended cruise? Visit your ancestral lands? Buy that boat or vacation home you’ve wanted for decades? The equity in your home may help check those experiences or investments off your bucket list.
- Small business or real estate investments: Using home equity through a HELOC to provide equipment or operating capital may be the difference between dreaming of being one’s own boss and living the dream.
- Retirement: Access to home equity can provide a financial cushion for a more secure retirement.
Key considerations beyond mortgage refinance rates
For all its potential benefits, refinancing still requires careful weighing of several factors, including mortgage refinance rates.
Closing costs, though a small fraction of the capital, are significant and need to be compared to savings promised by lower payments or shorter terms. Some of the fees include credit check, appraisal, title search, loan origination, recording of legal documents, and escrow funds for taxes and, if required, mortgage insurance.
The comparison of closing costs and interest rates will determine your projected savings and your break-even point – how long you will have to keep the new mortgage for the monthly savings to repay the closing costs and start accruing to your benefit.
Risks are another consideration. Although risks may be minimal in a booming market, they cannot be dismissed entirely. Economic downturns do happen, whether locally due to a major employer’s shutdown or nationally because of a global recession. Homeowners caught in such squeezes often face the double whammy of suddenly having less income due to job cutbacks or layoffs and finding their home’s value simultaneously going down. Such risks would be especially applicable when refinancing’s goal is to use home equity for purposes not directly related to the home’s value. On the other hand, very few investments have the long-term assuredness of residential real estate.
Consider, too, whether your credit score has experienced any changes since your existing mortgage. If you have a good payment history, your employment and income have continued unabated, and you haven’t taken on any other major debts, your score has probably stayed the same or perhaps even improved. Conversely, if you’ve changed jobs, made late payments or missed some, closed long-term credit accounts, or been the victim of identity fraud, your credit score may have taken dings.
Among other factors, refinance lenders will want to know that you’re within their parameters for debt-to-income ratio, that you have sufficient equity, and that your income, whether from work or retirement funds, is stable.
When Refinancing Makes Sense
All else being equal, a new mortgage or a HELOC can make financial sense in any of these scenarios:
- Mortgage refinance rates make a shorter payoff term or lower monthly payments possible.
- Consolidating consumer debt under a home loan saves interest and possibly makes the interest deductible from taxes.
- Equity can be used for educational expenses, to start or expand a business, or to fund improvements that will enhance the home’s value.
- Modest portions of the home’s equity can fund a longtime dream without inordinate financial strain or risk.
Conclusion
Refinancing may have “countless” advantages, but the counting is nonetheless vital. Your prospective new home loan may be a purely financial strategy such as saving mortgage interest or consolidating higher-interest debts, an investment such as expanding a business or completing an education, a bucket list item like exotic travel or a boat, or part of your plans to be comfortably secure in retirement, but the math must work.
Before committing to any refinance arrangement, make sure your calculator – maybe your accountant, too – agrees that the numbers are in your favor.
