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Consider a Mortgage Refinance, Even If You Bought Recently

Aug. 6, 2019
Finding the Right Mortgage, Mortgages
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Mortgage rates have fallen so much lately that millions of homeowners might benefit by refinancing — even if they bought a home just last year. A typical refinancer could save around $150 a month.

Some homeowners have gotten the message: Refinance applications have almost doubled compared to a year ago, according to the Mortgage Bankers Association. But many homeowners might be unaware that mortgage rates have declined so dramatically that they could save money by refinancing.

» MORE: Compare today’s refinance mortgage rates

Many potential refinancers

One rule of thumb says to consider refinancing if you can cut the mortgage rate by three-quarters of a percentage point. By that measure, millions of homeowners could benefit by refinancing into today’s mortgage rates, according to Black Knight, a technology, data and analytics provider for the mortgage industry.

In June, Black Knight estimated that 5.9 million homeowners could save over $150 per month on average by refinancing. It estimated that 953,000 of those potential refinancers got their mortgages in 2018. But mortgage rates have fallen even more in the two months since Black Knight calculated those figures. The number of homeowners who could benefit from refinancing is probably higher than that June estimate.

This refinancing opportunity has arrived because mortgage rates have been slowly falling for about seven months. Then last week, mortgage rates dropped sharply in response to a proposed increase in tariffs on Chinese goods, and the prospect of retaliation from China. The 30-year fixed-rate mortgage fell to 3.95% APR Monday, according to NerdWallet’s daily survey. Monday’s average 30-year mortgage was exactly three-quarters of a percentage point lower than its 2018 average of 4.7%.

You can save a lot

The average size of a refinanced mortgage was $324,500 in the week straddling the end of July and the beginning of August, according to the Mortgage Bankers Association. On a loan of that amount, the difference between a 4.75% rate and a 4% rate is $143.53 a month ($1,722.40 a year) in principal and interest.

To find out how much you could save:

If the numbers look promising, you’ll want to estimate your break-even period: the time it takes for the accumulated monthly savings to exceed the loan fees. For example, if you pay $4,500 in fees to save $150 a month, it will take 30 months to break even ($4,500 divided by $150 equals 30). If you believe you’ll stay in the house beyond the break-even period, it might be worthwhile to refinance.

» MORE: How to refinance your mortgage

Tips for the best refinance

In most cases, you can refinance whenever you want, although some lenders require “seasoning” between mortgages, requiring a certain period to pass between appraisals.

You can refinance to the same payoff date as your current loan, which can be useful when you want to pay off the mortgage before retirement or the kids go off to college. For example, if your 30-year mortgage is exactly 5 years old when you refinance, you can request to pay off the new loan in 25 years. Tell the lender to amortize the mortgage for 25 years (or whatever number of years you wish).

When they can afford it, many people refinance from a 30-year to a 15-year loan. The shorter loan usually has higher monthly payments, but the interest paid over the life of the loan is much less.

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