Mortgage Rates Are Down. Should You Refinance?

309

Q: Mortgage rates are so low — should I consider refinancing my current mortgage?

A:  Yes, mortgage rates have moved down dramatically over the past year. While record numbers of folks have already refinanced, some may still be unsure, or unable due to job losses. Here’s what you should know to potentially take advantage of this opportunity, if you can.

For today’s homebuyer, mortgages are just about cheaper than ever. Mortgage rates fell to another record low to begin 2021. The average interest rate on a 30-year fixed-rate mortgage dropped to 2.65%, according to Freddie Mac. That’s the lowest level in the nearly 50 years that the mortgage giant has been publishing the survey. The 15-year fixed-rate mortgage dropped to 2.16%.1

Current rates are nearly a full percentage point lower than a year ago, when the 30-year fixed-rate averaged 3.64% and the 15-year was 3.07%.1 However this past week, rates have begun to rise slightly from these record levels.

These exceptionally low rates are tempting many homeowners to refinance their existing mortgages. 

Refinance applications rose 20% for the week ending January 8, 2021 compared to the prior week, according to the Mortgage Bankers Association’s seasonally adjusted index. That’s 93% higher than a year ago and the highest rate since March 2020.2

But there are a number of factors you’ll want to take into consideration before deciding if refinancing is worthwhile for you. 

Rate Differential 

The old and arbitrary rule of thumb said that a refi only makes sense if you can lower your interest rate by at least a full percentage point — for example, from 5% to 4%. But what really matters is how long it will take you to break even. In other words, make sure you understand — and are comfortable with — the amount of time it will take for your overall savings to compensate for the cost of the refinancing.

Consider this: If you had a 30-year, $100,000 mortgage with a 5.5% interest rate, your monthly payment would be $568. If you refinanced at 3.5%, your new monthly payment would be $449, a savings of $119 per month. Assuming that your new closing costs amounted to $2,000, it would take about 17 months to break even ($2,000/$119 = 16.8). If you planned to stay in your home for at least 17 more months, then a refi might be appropriate. For most people, however, the rate differential — and monthly savings — are likely to be less dramatic:

Difference Between Old and New Rate Monthly Savings  
(assuming 5.5% initial rate)
Months to Break Even, Assuming $2,000 in Closing Costs
0.50%$3165
0.75%$4643
1.00%$6133
1.25%$7626
1.50%$9122
1.75%$10519

Source: DST Retirement Solutions, LLC, an SS&C company. Based on a 30-year, fixed-rate, $100,000 mortgage, including principal and interest 

How Long You Expect to Own the Property

How long you plan to live in your home is a key variable that should influence whether you refinance your mortgage. It’s only worthwhile if you expect to remain in your home long enough to recoup the cost of refinancing.

Closing Costs 

When you refinance, you’re likely to incur a number of different closing costs. You may pay a mortgage broker fee (assuming you do not go directly to a bank or other lender), a title insurance premium, a commitment fee, points, attorney or settlement fees, an appraisal fee, and other costs that add up quickly. So you’ll need to determine whether the savings from a lower rate justify the closing costs.

Here’s a summary of possible closing costs you might encounter:3

  • Appraisal fee ($300-$400)
  • Home inspection ($300-$500)
  • Application fee (varies)
  • Attorney’s fee (hourly)
  • Origination fee (about 0.5% of loan amount)
  • Discount points (1 point costs 1% of the loan amount)
  • Mortgage broker fee (0.50% to 2.75%)
  • Mortgage insurance application fee (varies)
  • Upfront mortgage insurance (0.55% to 2.25%)
  • FHA, VA and USDA fees (1% to 3.3%)
  • Title search fee (about $200)
  • Lender’s title insurance (varies)
  • Owner’s title insurance (0.5% to 1% of purchase price)

Stick With What You Know?

Finally, keep in mind that your current lender may make it easier and cheaper to refinance than another lender would. That’s because your current lender is likely to have all of your important financial information on hand already, which may reduce the time and resources necessary to process your application. But don’t let that be your only consideration. To make a well-informed, confident decision you’ll need to shop around, crunch the numbers, and ask plenty of questions. While I do not offer lending services, please let me know if I can answer any additional questions you may have.

Notes:
1Source: CNN Business, Mortgage Rates Kick Off 2021 With a New Record Low, January 7, 2021.

2Source: CNN Business, Refinance Applications Spike 20% as Homeowners Rush to Get Low Rates, January 13, 2021

3Source: Nerdwallet.com

Jeremy R. Gussick is a Certified Financial Planner™ professional affiliated with LPL Financial, the nation’s largest independent broker-dealer.*  Jeremy specializes in the financial planning and retirement income needs of the LGBT community and was recently named a 2020 FIVE STAR Wealth Manager as mentioned in Philadelphia Magazine.** He is active with several LGBT organizations in the Philadelphia region, including DVLF (Delaware Valley Legacy Fund) and the Independence Business Alliance (IBA), the Philadelphia Region’s LGBT Chamber of Commerce.  OutMoney appears monthly.  If you have a question for Jeremy, you can contact him via email at jeremy.gu[email protected]

Jeremy R. Gussick is a Registered Representative with, and securities and advisory services are offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.

This article was prepared with the assistance of DST Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This communication is not intended to be tax advice and should not be treated as such. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.  

Because of the possibility of human or mechanical error by DST Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems Inc. be liable for any indirect, special or consequential damages in connection with subscribers’ or others’ use of the content.

© 2020 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved.