My mortgage is small and my interest rate is less than 4% – would a refinance be worth it?
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Dear credible money coach,
I currently have a 30 year loan with an interest rate of 3.375%. I have nine years in office and have excellent credit. I owe about $ 54,000. Would it be worth refinancing? – David
Hello David and thank you for your question. Many homeowners are in the same situation right now and are wondering if they should refinance their mortgage.
To answer your question, we need to consider current mortgage refinancing rates, how they will change in 2022, and your current rate.
Refinancing rate from January 2022
For much of 2021, mortgage rates for purchases and refinances were at all time lows. In March 2021, a year after the pandemic first hit the United States, 30-year fixed-rate mortgage refinances averaged 3.098%, according to data compiled by Credible. But that was the average, and for several days that month the rates fell below 3%!
In September 2021, the rates started to increase. In December, the 30-year average refinancing rate stood at 3.132%, which was still an excellent rate.
Before the pandemic, mortgage purchase rates were significantly higher than today. Data from Freddie Mac shows that in March 2019, the average 30-year fixed-rate mortgage was 4.27%, with 0.5 points, bringing the effective interest rate to almost 5%.
The possible future of interest rates
Mortgage experts predict that rates will rise in 2022, although expectations vary on the size of the increases. Here are some notable projections for 30-year fixed rates:
- 4% by the end of 2022 – The Mortgage Bankers Association
- 3.5% on average for the whole of 2022 – Nadia Evangelou, Senior Economist and Director of Forecasting at the National Association of Realtors®
- 3.4% in the fourth quarter of 2022 – Fannie mae
- 3.5% on average for the whole of 2022 – Freddie mac
Would it be worth refinancing your mortgage?
The mortgage interest rate is only one factor in determining whether refinancing would be advantageous a borrower. Also consider the refinancing closing costs when considering good faith estimates potential lenders. And know how long you plan to stay in your home – the longer you keep a refinanced mortgage, the more profitable it will be.
If you took out your mortgage in 2012 at 3.375%, that was a good rate then. It’s not much higher than the going rate you might get today for refinancing.
A general rule of thumb is to consider refinancing when you can lower your interest rate by at least 0.75%. Therefore, refinancing over a 30-year term does not make sense to you since the difference between your current mortgage rate and the 30-year average refinance rate is considerably less.
However, if you can handle a higher monthly mortgage payment, refinancing in a shorter repayment term would save interest over the life of a new loan. In December 2021, the 15-year average refinancing rate was 2.375% and the 10-year average rate was 2.330%. Refinancing under either of these conditions in December would have reduced your rate by at least 1%, saving you money.
The bottom line
If you are able to get approval for a mortgage refinance at least 0.75% less than your current rate and can afford the closing costs, it may be worth it.
But because your mortgage balance of $ 54,000 is relatively low, it can be difficult to find a lender willing to work with you. This is because refinancing a low mortgage balance is not as profitable for a lender as a higher amount.
If your goal is to reduce your total interest or pay your house earlier, consider paying off your mortgage early. For example, you could pay more on your principal balance each month or send an additional payment each year.
Reducing your repayment term can dramatically reduce your interest, which could save you thousands of dollars over the life of the loan. Just make sure your lender knows they need to make additional payments against your principal. Otherwise, they can keep it on deposit, which won’t help you save money.
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About the Author: Laura Adams is a personal and small business finance expert, award-winning author and host of money girl, a top rated weekly audio podcast and blog. She is frequently cited in the national media, and millions of readers and listeners benefit from her practical financial advice. Laura’s mission is to empower consumers to live richer lives through her work as a speaker, spokesperson and advocate. She received an MBA from the University of Florida and lives in Vero Beach, Florida. Follow her on LauraDAdams.com, Instagram, Facebook, Twitter, and LinkedIn.