With today's mortgage rates at historic lows, you may be thinking about refinancing your mortgage to lower your monthly payments and improve your financial situation.
When you refinance your mortgage, you are applying for a new mortgage to replace your current one, which will result in a new rate, term and monthly payment. If you decide to refinance, be sure to shop around for the best rate and term for your needs.
When to Consider Refinancing
You may consider refinancing if any of these scenarios applies to you:
- Mortgage rates are lower than when you closed on your current mortgage. Locking in a lower interest rate will lower your monthly payment.
- Your financial situation has improved. You can secure a loan with a shorter term so that you can own your home sooner.
- Your adjusted-rate mortgage (ARM) is adjusting upward. Converting to a fixed-rate mortgage can provide you with the security of consistent payments.
How Mortgage Rates Affect Your Monthly Payment
The most common type of refinance is a no cash-out refinance, in which you are refinancing the remaining balance on your mortgage.
Consider, the following example when refinancing a $200,000 outstanding loan balance into a 30-year fixed-rate mortgage at various rates.
|Mortgage Rate||Monthly Mortgage Payment*|
* Mortgage payments are principal and interest only, based on a $200,000 fully amortizing mortgage. All terms are assumed to be 30 years.
As you can see, slight differences in mortgage rates have an impact on your monthly payment. At the low average mortgage rate of 3.15%, your monthly mortgage payment would be $859.
With mortgage rates at or near historic lows, refinancing could help you save by reducing your monthly payments and reducing the total amount of interest that you pay over the life of the loan.
Refinancing During COVID-19
If you have been approved for one of Freddie Mac’s relief options, and you are current on your mortgage, you can still take advantage of today’s low mortgage rates. You may also be eligible if you missed payments but subsequently reinstated your mortgage or made three straight months of timely payments.
The Costs of Refinancing
While refinancing your mortgage could save you money, both in the long- and short-term, it isn't free. Just as you had closing costs and associated fees with your current mortgage, there are refinancing costs.
The average cost to refinance is almost $5,000, and you should carefully consider how long you plan to stay in the home for the savings to outweigh the costs.
For the most part, refinancing costs are similar to what you paid when you purchased your home, including a loan origination fee. There are required services involved, as well as state and local fees that can vary significantly based on where you live. You should expect to pay for:
- Government recording costs
- Appraisal fees
- Credit report fees
- Lender origination fees
- Title services
- Tax service fees
- Survey fees
- Attorney fees
- Underwriting fees
To get a sense of what refinancing could cost you, check out our refinance calculator.
As with any big financial endeavor, you'll want to do your homework, look carefully at your short- and long-term goals, and work closely with your lender to do a cost-benefit analysis.
You should work closely with a lender to discuss refinancing options that fit your financial goals. You can refinance through your existing lender or a new lender. What's most important is that the lender you choose is trustworthy and offers competitive rates and terms.
If you are facing financial hardship, help is available. For more information on COVID-19 housing relief, visit My Home by Freddie Mac®.