Over the past five years, the average mortgage interest rate hovered between 3.5% and 4.5% – the lowest rates of the past 30 years. This relatively low rate meant that homeowners across the country could refinance their home mortgage, and potentially save thousands of dollars over the course of their loan.
But there are signs that this low interest rate may not be around much longer. Mortgage interest rates have started to climb. The federal reserve raised its rates again in December, and economists believe they may continue to raise their rates in the foreseeable future. This means that home interest rates are going up, and they may go up quickly.
Is It Too Late to Refinance?
Too few homeowners want to think about their mortgage. So it’s not uncommon to have waited on refinancing despite low interest rates. Yet because interest rates are going up, many worry that it may be too late to refinance and they may have missed their window.
Depending on the amount of your home loan, however, that may not be the case. When determining the “right time” to refinance, loan specialists look at several factors. Two of the most important include:
- Current interest rate / new interest rate
- Plans to sell
It is not necessarily important whether the interest rate is rising. Rather, it is important to see what your new interest rate would be compared to your current rate. Financially, any decrease in interest rate by about 1% to 2% represents a significant financial savings over the course of the loan.
To put it in perspective, if you had a loan of $300,000 at 6% interest, your monthly payments would be $1799. If that rate drops to 5%, your monthly payments would be $1610 – a savings of over $170 per month. Even if your closing costs were over $3000, you would still make up that difference in savings in only 17 months.
The only remaining question would be whether or not you have plans to sell your home in the near future. Those not planning to stay in their home may not live there long enough to make up for the closing costs, especially if the rising interest rate has reduced how much money you’ll save after a refinance. But for those that plan to stay in their home for at least a few more years, the savings could be significant.
Locking In a Lower Rate
It is true that rates may be rising, and if that’s the case then the longer you wait, the more you may lose out on possible savings. But it’s never too late to refinance if the savings are there. As long as there is a strong financial incentive, thanks to a lower interest rate than you’re currently paying, it may be in your best interests to consider refinancing your home loan.