Is Refinancing Worth It for an Interest Rate Just 1% Lower?

Everything to consider before you make the most popular mortgage move.

By Marisa Schley

What's one of the biggest reasons why homeowners choose to refinance their mortgage? To secure a lower interest rate. That lower rate could translate to hundreds, even thousands, of dollars saved over the life of your loan.

Yes, there are closing costs and fees to consider, but if the end result allows you to keep a life-changing sum of money, it's well worth the upfront hit. So that begs the question:

Is it worth refinancing for an interest rate that's just one percent lower?

While traditionally it has been thought that a two percent drop is an ideal situation for refinancing a mortgage, you may be surprised to learn just how much you can save by snagging an interest rate that is just one percent lower than what you currently pay.

Here's what a one percent drop could mean for you, as well as a few other important factors to consider before deciding if a refinance is the right money-move for you.

The One Percent Difference

How much does one percent save on a 30-year mortgage? Let's compare a few numbers.

If you had a 30-year fixed loan for $500,000 at 4.5 percent, you'd pay:

  • $2,533/month
  • $412,033 total interest

If you had that same loan at 3.5 percent, you'd pay:

  • $2,245/month
  • $308,280 total interest

While it may not seem like a big difference in monthly installments, when you compare the total interest paid over the life of the loan, there's a massive difference. The money saved on contracts that have just a one percent lower interest rate can add up over time.

Smaller loans can save as well. Let's look at a 30-year fixed-rate loan for $300,000 at 3.79 percent. You'd pay:

  • $1,396/month
  • $202,619 total interest

How would this loan change with a historically low interest rate, like what the market currently offers? That same loan at 2.79 percent means you'd pay:

  • $1,231/month
  • $143,192 total interest

Again, while $165 saved a month may not seem like much, nearly $60,000 saved over the life of the loan is a big chunk of change!

Keep in mind, these examples are for new, fixed loans. If you're looking to refinance, you've likely been making payments on your loan for some time. That means there are many other factors to consider before refinancing.

Ask Yourself These Two Questions

Before contemplating a refinance, ask yourself these two questions:

How much will I save overall by refinancing? How long do I plan on staying in the home?

The answers to these questions can help you better determine if it's the right time to refinance your mortgage.

The cost of the refinance is a big factor to consider, as it could be as much as 6 percent of your loan amount. Carefully weigh the money saved against the fees that a refinance could include, like application costs, the price of a home appraisal, and origination fees. Even with all of those costs factored in, many say that the money saved in the long run is well worth the cost of refinancing.

Another big thing to consider before replacing your current mortgage contract with a new one is the length of time you plan on staying in the home. If you know you're going to sell in a year, you may not be able to recoup refinancing costs, which means it wouldn't be a smart financial move.

You may also want to consider how many years you are into your current contract before deciding on a course of action. If you're ten years into a 30-year loan, you may not want to start fresh on another 30-year. Upping your monthly installments to shorten your loan term may be the better move.

The decision of whether or not to refinance really depends on your unique situation. While, generally speaking, refinancing for an interest rate that is just one percent lower is worth it in the long run, it's best to speak with a reputable lender before making any decisions. That way, the details of your situation can be taken into account. Don't make any moves unless you thoroughly understand your bottom line! Connect with a lender to learn more today.

Now is the Time to Refinance

If you are considering a refinance, now is the time to act! Why? Because interest rates are at all-time lows. Here's a look at how rates have changed for 30-year fixed loans over the past few years, according to a mortgage market summary complied by Freddie Mac:

  • Jan. 5, 2017: 4.20%
  • Jan. 4, 2018: 3.95%
  • Jan. 3, 2019: 4.51%
  • Jan. 9, 2020: 3.64%
  • Jan. 14, 2021: 2.79%

It's not a matter of if rates will go up, but when.

If you're considering shopping around to see what other lenders offer, now is the time!

Compare Lenders Today

When it comes to comparing mortgage lenders, what do borrowers want? No-obligation quotes from providers eager to work with them. That's exactly what you'll get when you use Lendgo to connect with mortgage refinance lenders in your area.

In just a few minutes, you could have quotes from multiple providers, which gives you some serious negotiating power. On average, those who evaluate more than one lender go on to save more money than borrowers who work with just one. Negotiating more competitive terms for yourself thanks to comparison shopping and refinancing? That's potentially a double-savings situation! If you're a borrower with an adjustable-rate mortgage who is nearing the end of your initial term, now is an especially important time to consider refinancing.

So, what percentage drop is worth refinancing? It could be as little as a one percent difference! The only person that can help you answer this question . . .

Should I refinance my mortgage?

. . . is a trusted lender. They're the ones who can look at your current contract, the amount your new loan will be for, factor in all associated fees, look into your financial health, and account for the specific goal you hope refinancing will achieve. All of that information combined can help you make an informed decision. So, connect with a lender now, before rates start to rise!