Broker Check

When to Refinance Your Mortgage

| January 31, 2024

We have recently started to see a downtrend in mortgage rates from what was observed in October 2023 when 30-year mortgage rates peaked at 8%. Those who may have bought a house at a high interest rate might be thinking about when to refinance their mortgage and whether it’s worth it given the time, costs, and long-term financial implications.

Historically, the general rule for refinancing has been, if the interest rate’s improvement would be a 2% or greater difference then it makes sense to refinance. However, recently lenders have seen that a smaller interest rate benefit, even a 1% reduction in interest rate, can be attractive when looking to refinance depending on several factors.

Interest rates are a key component but not the only thing to consider when deciding to refinance. The three typical key components include: 1. Interest rates (as mentioned), 2. Fees to refinance, and 3. How long you might be staying in your home or continue to hold the new mortgage.

Fees to refinance typically include new title fees, underwriter fees, and new appraisal fees – all of which can total to a one-time cost of ~$2,500-$3,500 (in California) that is charged at the closing of the new loan. These closing costs should be considered when trying to calculate the change in mortgage payments and how long it may be until you start seeing actual savings in the total amount paid. Oftentimes the savings may not be seen until at least 12-24 months, depending on the difference between interest rates and overall loan amount.

Another thing to consider is that refinancing may not be worth it if you are planning to move soon, or if most of your mortgage is paid off – as you will have fewer years to make up the costs/fees from refinancing. In addition, if your expectation is that mortgage rates may continue to decline you may want to hold off on refinancing. For example, if you have a mortgage at 8% and rates fall to 6.5% it may appear financially advantageous to refinance. However, if the expectation is that mortgage rates may continue to decline so that the rate may be down to 5.5% within one year it may be better to continue to pay the higher rate in the short-term to avoid the potential to do two refinances, and paying double the fees, as rates fall.

A lower interest rate is certainly attractive, but make sure you take other factors into account when trying to calculate total savings and if it is worth it for you. When you’re starting to wonder about refinancing it is always a good idea to contact your lending agent and pick their brain with regards to interest rate trends (in case rates continue to fluctuate) as well as draw up some numbers about total fees and new mortgage payments. Your lender may also have promotions that allow them to decrease or waive refinance fees. You can track mortgage rate fluctuations over time on to get a general idea of rates offered; however, it is also good to browse around and see if any local lenders may offer an even better interest rate.  This will allow you to make the most informed decision and find what works best for your financial situation.