Many homeowners who’ve been monitoring the record drop in mortgage rates are likely to start thinking about refinancing their home loans. Who can blame them? It’s as if Don Corleone, “The Godfather” himself, was whispering in their ears about an offer they can’t refuse.
Since the spring of 2020, average 30-year fixed-rate mortgages plummeted to below 3%—a level not seen since the US government started tracking mortgage rates in 1971. Popular 15-year fixed-rate mortgages have also fallen to record lows.
Homeowners who sharpen their pencils and do their homework may now have a unique opportunity to achieve one or more of the following goals by refinancing:
- Reduce monthly mortgage payments
- Pay off an existing mortgage ahead of schedule
- Trade an adjustable-rate mortgage (ARM) for a fixed-rate mortgage
- Tap home equity to raise cash
Refinancing your mortgage means paying off your existing loan and replacing it with a new one. But a “refi” comes with its share of closing costs—points, application fees, origination fees, commissions, etc. Keep in mind that refinancing only makes sense if you plan to stay in your home long enough to recover those closing costs.
While doing the math, don’t forget to include monthly payments for local property taxes, homeowners insurance, and, if applicable, private mortgage insurance (PMI). In the examples we discuss here, taxes and insurance are omitted.
With that in mind, let’s take a closer look at how today’s lower rates might affect those four primary refinancing goals: