Should you refinance your mortgage now?

Should you refinance your mortgage now?
Mortgage refinance loan
Mortgage refinance loan

Mortgage refinancing rates in recent weeks have been dropping at a pace we haven’t seen in quite a long time.

As of this writing, the current average 30-year fixed mortgage refinance rate is down to 3.70%, according to Zillow. That's down more than a full percentage point from the nearly 5% rates we were seeing in late 2018:

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Mortgage interest rates chart
Mortgage interest rates chart

Clark Howard’s simple rule for when to refinance your mortgage

So, if the interest rate you’re paying on your mortgage is significantly higher than the rates you’re seeing now, should you refinance?

“One week recently, refi applications were 60% higher than the previous week,” Clark says. “That’s no accident. A lot of people are recognizing that they can save a lot of money in the long term by refinancing now.”

So how do you know when you should refinance?

Here’s what Clark says:

"If you can make back the cost of the refinance in 30 months or less, you should do it. It just makes financial sense. That's the trigger."

When you figure out what you’re going to have to pay to do the refi (there are almost always costs involved) versus what you’d be saving on interest per month, you can figure out the break-even point.

“So, you should be sure you’re going to be staying in the house for at least 30 months,” Clark says, “but most people end up staying in a house longer than they think they’re going to.”

While the 30 month rule is Clark's general gauge, there are calculators available that will show you exactly what your break even point will be and how much money you can save over the life of your loan:

As you punch your particular numbers into the calculator, you might see what your monthly payment would be if you refinanced into a 15 year mortgage. Rates for those are even lower (currently averaging 3.18%, according to Bankrate), so if you can afford what is likely to be an increase in your monthly payment, you pay of your loan quicker and potentially save even more money over the long haul!

“The huge advantage with a refi is going into a 15 year loan,” Clark says. “If you’ve been in your loan for a while, going into a 15 is the grand slam.”

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