Mortgage rates have fallen nearly one percentage point from a year ago, making it possible for some homeowners to save money by refinancing.
The 30-year fixed rate slipped to 5.99% on Monday, down from 6.96% a year earlier, according to Mortgage News Daily. Last week, applications to refinance a home loan rose 7% and were 132% higher than the same week a year earlier, according to the Mortgage Bankers Association.
While many homeowners still hold mortgages with rates well below today’s levels, a growing share are carrying higher borrowing costs. Roughly 1 in 5 borrowers now have mortgage rates of 6% or higher, according to Realtor.com — including many who locked in rates above 7% in the last few years.
For those borrowers, a “1% drop can be a nice rule of thumb for when to consider a refinance,” says Rob Greenman, a certified financial planner in Portland, Oregon. Whether refinancing makes sense depends on how the upfront, one-time costs compare with the long-term savings from lower monthly payments, he says.
Do the math before refinancing
Refinancing typically comes with one-time closing costs that run about 2% to 5% of the loan balance, per Bankrate.
To estimate whether refinancing makes sense, divide those closing costs by the amount you expect to save each month. The result will show how many months it would take to recover the upfront expense, says Joon Um, a CFP in Beverly Hills, California.
If you don’t plan to stay in the home long enough to recoup those costs, refinancing may not make sense, he says.
For example, on a 30-year mortgage with a $400,000 balance, a 1-percentage-point drop from a 7.04% rate could lower monthly principal and interest payments by roughly $263. If closing costs total 3% of the loan balance, or about $12,000, it would take nearly four years to break even.
Homeowners should also be cautious about resetting the loan term. Refinancing replaces the existing mortgage with a new loan, requiring borrowers to select a new repayment timeline. Many choose a fresh 30-year term, even after paying down several years, per Experian.
While it can be tempting to extend the term to reduce monthly payments, stretching out the repayment period may increase the total interest paid over time, Um says.
Refinancing should support broader financial goals, not just reduce a monthly bill: If the move improves flexibility, savings or long-term security, it may be worthwhile. “If it just frees up spending money, think twice,” says Um.
Borrowers should aim to recoup closing costs within 18 months to two years through monthly savings when refinancing, says Melissa Cohn, regional vice president at William Raveis Mortgage. If the break-even timeline stretches beyond that, waiting may make more sense, she says.
To estimate potential savings, homeowners can use CNBC Make It’s mortgage calculator.
Where mortgage rates could head next
Mortgage rates have declined in recent months as the yield on the 10-year Treasury, a benchmark that mortgage rates tend to follow, has slipped from around 4.25% back toward 4%. Softer inflation data, geopolitical risk and expectations that the Federal Reserve could cut rates later this year have helped push yields lower, says Cohn.
It’s also the start of a new year, when lenders often compete more aggressively for business, she says.
Where rates go from here will depend on incoming economic data. If inflation continues to cool and the economy slows, rates could drift lower. If inflation picks up again, they are likely to rise. That said, mortgage rates “never move in a straight line,” Cohn says.
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