Mortgage Rates Have Risen. Should I Still Refinance?

by Maurie Backman | Updated July 19, 2021 - First published on April 23, 2021

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Here's how to decide if refinancing still makes sense.

At the very start of the year, mortgage refinance rates sat at 2.846% for a 30-year fixed loan. Fast forward to April, and that number has climbed to 3.415% as of this writing.

For a $200,000 mortgage, the difference between those two interest rates is an extra $63 a month for principal and interest. And that begs the question -- does it pay to refinance now that mortgage rates have gone up? The answer depends on your personal situation.

To refinance or not -- that's the question

Before we talk about whether refinancing makes sense right now, let's put the situation into context. A refinance rate of 3.415% is clearly not as attractive as a rate that's under 3% -- but on a historical basis, it's still a strong rate.

So, should you refinance today? Doing so could pay off if you can lower your interest rate substantially.

Rather than getting hung up on how today's refinance rates are higher than they were a few months ago, take a look at how much savings you specifically stand to gain by refinancing. As a general rule, refinancing is a good idea if you can lower your loan's interest rate by 1% or more. For example, if you locked in a 4.5% interest rate on your original mortgage and you refinance to a rate of 3.415%, you could lower your monthly payments on a 30-year, $200,000 mortgage by $124. That's almost $1,500 a year back in your pocket.

Of course, you'll also need to make sure you plan to stay in your home long enough for refinancing to make sense. When you get a new home loan, there are closing costs involved -- similar to the fees you pay to finalize an original purchase mortgage. Closing costs typically range from 2% to 6% of your loan amount.

So, let's say that to refinance a $200,000 mortgage, you're charged 3.5% of that sum in closing costs, or $7,000. Since refinancing will save you $124 a month, it will take you almost 57 months, or close to five years, to break even. Now, that may seem like a long time, but if you're planning to stay in your home for another 25 years, it means you'll enjoy a solid 20 years of savings once you've reached that break-even point. On the other hand, if you think you might move within the next five years, then refinancing doesn't make sense.

The break-even factor applies no matter how high or low refinance rates are. Whatever rate you're looking at, you'll need to make sure you plan to stay in your home long enough to come out ahead after paying closing costs. Lower refinance rates will give you a quicker break-even point, but you'll want to confirm those numbers with a mortgage calculator nonetheless.

Seeing mortgage refinance rates climb can be a bummer. But just because rates are higher today than they were a few months ago, that doesn't mean you can't get a good deal. In fact, if you show lenders you're a strong refinance candidate with a high credit score and low debt-to-income ratio, you might snag an offer that's better than the national average. And that would mean even more savings for you to enjoy.

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