Homeowners

Millions of Homeowners Could Save Money Right Now by Refinancing. Are You One of Them?

After years of high mortgage rates, homeowners may finally be catching a break.

Rates have slipped closer to 6% in the past few weeks, recently hitting their lowest level in more than a year. The recent dips could mean serious savings for millions of borrowers who are considering refinancing their mortgages.

Indeed, more than 4 million homeowners may benefit from refinancing at today’s lower interest rates, according to ICE Mortgage Technology.

The November report noted that within that group, about 1.7 million homeowners are especially well positioned to refinance. These are owners who have mortgage rates of 6.92% or higher, solid credit scores above 720, and at least 20% equity in their homes.

And if mortgage rates dropped slightly to 6.125%, about 5 million homeowners would then be candidates to refinance.

“With rates softening right now, refinancing offers a perfect chance for homeowners to reposition how their debt serves them,” said Chris Heerlein, CEO of REAP Financial, a wealth management firm in Austin, Texas. “With refinancing, you can even redirect your savings toward building an emergency fund or accelerating retirement contributions.”

For anyone who bought real estate when rates surged in the pandemic’s aftermath, now may be a good window in which to lower their costs. Here’s what homeowners considering a refinance need to know.

Why more homeowners are refinancing their mortgages

More homeowners have been refinancing their loans as mortgage rates have fallen. In the first week of November, refinance applications surged 147% year-over-year, according to the Mortgage Bankers Association.

During the 2020 and 2021 refinancing boom, homeowners who locked rates in the 2% or 3% range effectively won the mortgage lottery. But the many people who bought a home after that, especially in 2022 when rates jumped above 7%, have been waiting for a chance to catch up.

Now, with rates finally cooling, the math is starting to work again. For a homeowner with a $300,000 loan at 6.92%, the monthly principal and interest payment sits around $1,980.

Refinancing at 6.25%, roughly where rates have hovered in recent weeks, would lower that payment to about $1,847. That is a savings of about $133 a month, or nearly $1,600 a year.

On a $600,000 loan, the savings jump even more, with monthly payments falling by about $265 at today’s rates. That adds up to more than $3,180 a year.

The actual figure will vary based on loan size and the difference between their current rate and the market rate. But even a modest dip in rates can create meaningful breathing room in your budget.

How much does it cost to refinance your mortgage?

Before refinancing your mortgage, homeowners should understand that doing so isn’t exactly free money.

Closing costs usually run 2% to 6% of the loan amount. This covers lender fees, title insurance, and appraisal charges. On a $300,000 mortgage, that’s $6,000 to $18,000.

The real question is how long it takes for your monthly savings to outweigh those costs. If you’ll stay in your home long enough to hit your “break-even” point, refinancing may make sense.

For example, saving $200 a month on a loan that costs $6,000 to refinance means you’ll break even in 30 months. Stay in your home longer than that, and the savings start stacking up.

Homeowners planning to move or sell within a couple of years, however, might not recoup those upfront costs.

Saving money isn’t the only reason to refinance your mortgage

Lowering your monthly payment is the most common reason to refinance. But it’s not the only one.

Some homeowners use this opportunity to shorten their loan term, moving from a 30-year to a 20- or 15-year mortgage. This could help them pay off their home faster and save on interest payments over the long-term.

Others may refinance to switch from an adjustable-rate loan to a fixed-rate one.

Each option changes your long-term picture differently. A new 30-year loan resets the clock, which can delay full ownership even as it trims the monthly bill.

“You’re essentially extending payments further into your future,” said Heerlein. “There may be a drop in your payment, but you’ll still end up shelling out more money for the interest. This delays your financial progress.”

Shorter loans terms typically raise monthly payments but help you build equity faster. The right choice depends on your financial priorities and how long you expect to stay put.

Why home equity and credit scores count

Refinancing is easiest for borrowers who’ve built up home equity and have strong credit scores. With at least 20% equity in your property, you’ll avoid paying private mortgage insurance (PMI). This is a common extra cost that can add $100 to $300 a month, or even more, to your housing bill

High credit scores also open the door to better rates and fewer fees. Lenders reward strong credit and equity because they signal lower risk.

Other reasons to refinance your home loan

Refinancing your mortgage has also become a tool homeowners use to reshape their entire financial picture.

“The motivation for a refi can be a number of reasons,” said Anthony Ramirez, senior loan officer at New American Funding based in San Diego, Calif. “It’s not only to reduce interest rates, but also to pay off a home sooner, consolidate debt, or even tap equity for improvements.”

Increasingly, he added, clients are using cash-out refinances to fund multi-generational living or to add accessory dwelling units (ADUs.) This is when you replace your existing mortgage with a new, larger one and pocket the difference.

“Maybe you would like to build a small ADU on your home for an aging parent to be housed or for your children to start off their young family,” said Ramirez. “These unique circumstances are new ways to improve your property value, while also keeping housing affordable.”

Anthony Ramirez NMLS# 249819