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If you take out a mortgage when interest rates are high, you might consider a mortgage refinance when rates go back down. Either because of the lower rate or by extending your term, a 30-year mortgage refinance can lower your monthly dues.
While paying less each month on your mortgage sounds attractive, remember that the longer you take to pay off your mortgage, the more you end up paying in interest. Also, the refinancing process includes closing costs (2% to 6% of your loan amount).
Before you change the terms of your home loan, review 30-year refinance rates and learn whether refinancing is right for your situation.
Understanding 30-year refinance rates
“Mortgage rates are set by several factors – some in your control, some not,” said Thomas Parrish, a lending executive at BMO Financial Group.
The factors under your control include your credit scores and loan-to-value ratio, or the size of your down payment. Mortgage refinancing lenders see you as a higher risk if you have low credit scores or don’t have a lot of equity at stake — and adjust your rate upward as a result.
The biggest factor outside your control is the economy.
“Mortgage rates rise when the economic outlook points to growth, higher inflation and a low unemployment rate,” said Parrish. “They fall when the economy slows, inflation falls and unemployment rises.”
Through 2023, mortgage rates have been trending higher because of the Federal Reserve Board’s efforts to reduce inflation. The Fed has raised interest rates because higher rates tend to slow the economy, which slows inflation.This rate environment is reflected in mortgage rates, which have risen from about 2.75% at the start of 2021 to 7.76% at the start of November 2023, according to the Federal Reserve Board of St. Louis.
How refinancing your mortgage works
During the refinance process, you take out a new loan (with a new interest rate and term) that pays off the old one. The biggest driver of refinancing is to get a lower rate, which reduces the monthly payment.
Example: Say you have a $250,000 mortgage tagged at 7.00% and you’re about six years into repaying, forking over $1,800 a month. If you can refinance to a 6.00% interest rate on a 30-year term, your monthly payments would go down to just under $1,500, creating about $300 of room in your monthly budget.(If you secured a 5.00% rate, your payment would be $1,342 each month.)
However, by refinancing in this scenario, you’re extending the time it will take to pay off the loan — and increasing the amount of interest repaid. You’ve already made 75 payments (or nearly six years’ worth) on the old loan, with 285 left. Conversely, with a new 30-year refinance at 6.00%, you’ll make 360 monthly payments, resulting in $26,595 more in interest charges. (With a 5.00% rate, because it’s so much lower than 7.00%, you’d save nearly $30,000 in interest over the life of the loan, even though you’re making 360 payments rather than 285.)
If you refinance for a shorter period, you can reduce the total cost of the loan and save more money. The following chart shows the difference between refinancing a $250,000 loan balance to various terms. Remember, lenders usually offer lower rates for shorter-term loans.
How to get the best 30-year refinance rates
If you’re attempting a mortgage refinance to save money,it’s critical to have high credit scores, which can qualify you for a better interest rate. To increase your scores:
Pay your bills on time
Bring any past-due accounts up to date
Limit how much you charge to your credit cards
Pay down debts, including reducing the balance you carry on credit cards
Avoid applying for or opening new credit accounts
Your debt-to-income (DTI) ratio, among other factors, will also be put under the microscope when you apply for refinancing. Lenders prefer borrowers with DTIs of 36% and below, but it may be possible to refinance with a 50% or lower ratio. If your DTI is too high, you might not qualify.
If you have enough cash to make up for relatively low credit scores or a high DTI, you could lower the interest rate on your new loan by paying points, which are a form of prepaid interest. One point equals 1% of the loan, or $2,000 on a $200,000 loan.
Compare your monthly savings with the lower rate to what you must pay for points to see how long it would take to break even. If breaking even takes a long time, perhaps longer than you plan to stay in the home, the points may not be worth the upfront cost.
Tip: Compare 30-year refinance rates among several lenders to see who offers the best rates and lowest fees. You have to pay closing costs with a refinance, just as you do with a home purchase loan, so it’s smart to shop around. (Advertised no-closing-cost refinances typically roll the fees into the loan balance or simply charge a higher rate.)
Pros and cons of a 30-year mortgage refinance
If you can get a 30-year mortgage refinance with a lower interest rate than your current mortgage, refinancing can result in a lower monthly payment. Also, if you want to use some of your home equity for renovations or another big expense, a 30-year cash-out refinance allows you to borrow the money at a lower interest rate than on a construction or renovation loan.
However, a 30-year refinance has some downsides, including having to pay closing costs (again) and extending the amount of time you’re paying off the mortgage. Your equity growth will also slow because most of your monthly payment will go toward interest during the early years of repayment.
Should you refinance to a 30-year term?
If your goal for refinancing is to save money on interest payments, use a mortgage refinancing calculator to compare the total cost of keeping your current loan versus the costs of a new loan. You’ll need to input your current loan balance, your interest rate and how many months of payments you still owe. You’ll also need to know the interest rate on the 30-year refinance loan you plan to borrow, though an estimate could suffice.
The calculator will show you how much interest you’d pay in each scenario and when you’ll reach the break-even point, or how many months it will take you to recoup the costs associated with the new loan. If you think you might move in a few years, make sure you’ll break even before then. Otherwise, refinancing may not be worth the cost.
You’ll see the biggest savings with a 30-year mortgage refinance when interest rates have fallen significantly from the rate on your current loan, or if your credit has significantly improved since you originally borrowed.
However, not all homeowners refinance simply to save money. There may be other scenarios where a new 30-year refinance makes sense, such as extending your loan term to get a more affordable monthly payment.
Frequently asked questions (FAQs)
How do 30-year refinance rates impact the total cost of your mortgage?
Your cost of borrowing depends on how much lower the new rate is and how long you’ve been repaying your current mortgage. Use a refinance calculator to compare the total cost of the refinanced mortgage with the total cost of continuing to pay your current mortgage.
What are the qualifications for a 30-year refinance rate?
The requirements for a 30-year refinance are similar to the requirements for getting a home purchase loan. Lenders will base their decision on your credit scores, income, debt level, the value of the home and other factors. For a conventional mortgage, lenders may require a loan-to-value ratio of 80% or less. In other words, the mortgage can’t be for more than 80% of the current value of the property.
Can you switch from a 15-year to a 30-year mortgage when refinancing?
You can switch from a 15-year mortgage to a 30-year mortgage when you refinance, although at a higher long-term cost of accruing interest. For short-term costs, monthly payments on a 30-year loan are lower than on a 15-year loan for the same principal amount when they have similar interest rates. Still, you can make extra principal payments to speed up the repayment of your new loan.
See the full article on mortgage interest rates, or, read more Arizona real estate investing news.
