How much does the interest rate need to drop to make it worthwhile to refinance my mortgage?

Question

Is there any general "rule of thumb"?

Thanks!

Answer 1

This depends more on just the interest rate drop.  You also have to look at  how much the loan fee will be for refinancing and if you'll have to pay points.  (the loan fee is typically $1500 to $2000, and you often pay points on top of that to get the lower rate.)   Figure out how much you'll save per month by the drop in interest rate, and then see how many months it will take you to pay back the money spent on the new loan and any points.  If you think you will move before the refinancing bills get paid, then it is not worth it to refinance.

We looked at doing this, and decided not to refinance because we will likely move in 3 to 4 years and it would  have taken 5 years to make the money back....if we were staying for the whole 30 year mortgage, we would have saved a bundle after those 5 years, but you have to look at how long you'll be in your house.

Answer 2

No person can actually provide an accurate answer to this question without first knowing the following:

a) Your current mortgage terms (including these specific terms):

i.) What is the length of the term?

ii) How long into this term is your mortgage - being very specific in terms of the exact number of months?

iii) What does the mortgage contract indicate as to the early prepayment penalty (ie. is it interest rate differential, 3 months interest, etc..)?

iv) Does the mortgage contract contain a no prepayment penalty clause after a certain length of time into the contract (ie. after, say, the 36 month mark)?

v) What type of mortgage do you currently have (is it a fixed rate mortgage or an adjustable rate)?

vi) What is the interest rate that you are currently paying?

vii) How is interest compounded (ie. daily, monthly, bi-annually, annually, etc)?

viii) What will the precise outstanding balance on your mortgage be as of the end of the last payment cycle prior to doing this switch?

b) Is the lender a different lender (who will thus be forced to register a new mortgage with the land title office)?

c) If you are at the end of your term, does your jurisdiction provide for a simple assignment of mortgage (because, otherwise, new legals and re-registration will need to be done)?

d) Is the new lender willing to absorb the costs of the re-finance (ie. the legals, registration costs and appraisal fee)?

e) Finally, what are the new lenders terms (specifically, the interest rate, compounding period, what is the precise amount of the refinance vis-a-vis your outstanding balance, and the length of the term)?



By the way, DO NOT contact a mortgage officer for so-called "help" on this question, because they will simply bamboozle you into taking a mortgage with them.

I calculate bond yields and annuity returns for fun, which is why I know how to help you.

Answer 3

The general rule is 2%.  Basically it needs to drop far enough that the savings in monthly payments will "pay back" your closing costs on the new loan within two years.

Answer 4

There really is no rule for this one.  You have to sit down and do the math.  Take into consideration ALL the additional fees you'll be paying to refinance, and then use the balance of your current loan in an online mortgage calculator to see how much money you'll save over the life of the loan.  If the fees are higher or even close to the amount you'll save, then it's not really worth the hassel.  If your overall savings are higher, go for it.

Answer 5

It depends on your current rate.  The average rate now is 6.25% if yours is higher you should look into refinancing,  each point will save you about $1000 for every $100,000 financed.

Answer 6

There is no thumb rule as it depends upon several factors. But approx its 6%. Here is the source of a mortgage financing company named http://iloanshop.com/apply_mortgage.php for your reference.

Answer 7

Some lenders will tell you it needs to be at least 1 point, and that is reasonable.  But before you do this, check to see if you have a pre-payment penalty on your current loan.  A pre-payment penalty will most likely make this cost prohibitive.   And despite what some lenders advertise, there are no loans that do not have fees attached, you will pay for this refinance somewhere.