How much can you save by refinancing your mortgage?

The coronavirus pandemic has had dramatic consequences for the U.S. economy. Job losses have surged, many businesses have shuttered and millions of Americans are feeling the financial burn. There has been one silver lining, though — and that’s low mortgage rates.

Mortgage rates have hit record-breaking lows several times this year, and it’s led to a surge in both homebuying demand and refinancing. In fact, in a recent week, refinances accounted for a whopping 65.4% of all loan activity. They’re also up 50% over the year.

Are you considering refinancing your mortgage, too? Before you make any major personal finance moves, do your homework — particularly on how much you can save by refinancing your mortgage. If you want an easy way to answer this, continue reading.

Does refinancing really save money?

Refinancing saves money — but the amount varies, depending on your personal finances and current loan. Here are some factors that will determine if you'll save money by refinancing.

• Your current loan's interest rate
• Mortgage rates you qualify for
• Your long-term goals as a homeowner

THE BASICS OF NO-CLOSING COST MORTGAGE REFINANCING

Use a mortgage refinance calculator to determine how your new rate would affect your monthly payment and long-term interest costs. Though the exact savings will vary depending on your specific situation,

Here’s an example of what lower rates could mean for you:

• Say you have a loan balance of $200,000 and a current interest rate of 4.25%. (That was actually quite low not that long ago). Without property taxes and insurance included, that means you’re paying around $984 per month and $154,000 in interest by the time your 30-year loan is done.
• If you can refinance that loan to 3.25%, the savings would be massive. You’d shave $114 off your monthly payment ($1,368 per year) and more than $40,000 in interest over the long haul.

Keep in mind these savings alone won’t make a loan refinance worth it. There are many reasons to refinance — but in order to save money by refinancing, you need to stay in the home long enough to save more than the new loan costs you.

HERE'S WHY MORTGAGE REFINANCING IS ABOUT TO GET MORE EXPENSIVE

Generally, refinances come with closing costs anywhere from 2% to 5% of the loan amount. In the above scenario, that means at least $4,000 upfront. For this investment to be worth it, you’d need to stay in the home for at least 35 months (35 x $114 is just about $4,000).

This is sometimes called the “breakeven point” and is a critical calculation if you want to be sure refinancing is a good move. If you’re not sure you’ll be in the home that long, then refinancing probably isn’t the best use of your money.

What are today’s mortgage rates?

Mortgage rates have hovered around record lows for most of the year and now is no different. According to Freddie Mac, the average rate on a 30-year, fixed-rate loan clocks in at a mere 2.87% this week — down 0.70 points over the year.

WHY IT'S A GOOD IDEA TO REFINANCE YOUR MORTGAGE WHILE RATES ARE LOW

Keep in mind the lowest interest rates are usually reserved for the least risky borrowers — ones with high credit scores, low levels of debt and solid and consistent income. If you don’t fall into this category quite yet, consider working on your credit and paying down some debts before applying for your refi. It can only help in the rate department.

Though rates change daily, waiting a bit to apply for your refinance shouldn’t pose too much of a risk. Most experts predict rates will remain low at least through 2021. Experts at mortgage purchaser Fannie Mae expect they’ll stick between 2.7% and 2.8% across all four quarters.

Compare rates and lenders

If you do decide to move forward with your refinance, always make sure to shop around. Mortgage refinance rates don’t just vary by day; they also depend on the mortgage lender you choose, your loan product, and many other factors. Shopping around can ensure you get the best possible deal and the lowest possible rate.

HOW TO GET THE BEST MORTGAGE REFINANCE RATES