Interest Rates Are at the Lowest Point in Nearly 4 Years – Should You Refinance?

A four-year low in mortgage rates has triggered a 15% surge in refinance applications, according to a new report.

If you choose to refinance now, you could lock in a great rate and lower your monthly mortgage, but is there a reason to be cautious? Read on to get money expert Clark Howard‘s take on the situation.

Interest Rates Are Falling: Time to Refinance?

The Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week of January 27-31 shows a 15% hike in refinance applications, the highest level in seven years.

As of this writing, the current average 30-year fixed mortgage refinancing rate is 3.59% for those with great credit, according to Zillow. That continues the downward trend we saw in late 2019:

The rate decrease hasn’t exactly translated into demand for homes on the market, according to the report. The seasonally adjusted Purchase Index, which indicates homebuying volume, actually fell 10% compared to the previous week.

Clark Howard’s Simple Rule on When to Refinance Your Mortgage

So, if the interest rates you’re seeing now are significantly lower than the rates you’re paying for your mortgage, should you refinance?

Money expert Clark Howard says “Yes, it’s time to refinance!”

“A lot of people are recognizing that they can save a lot of money in the long term by refinancing now.,” he says.

So how do you know when you should refinance?

Here’s what Clark says:

“If you can make back the cost of the refinance in 30 months or less, you should do it. It just makes financial sense. That’s the trigger.”

When you figure out what you’re going to have to pay to do the refi (there are almost always costs involved) versus what you’d be saving on interest per month, you can figure out the break-even point.

“So, you should be sure you’re going to be staying in the house for at least 30 months,” Clark says, “but most people end up staying in a house longer than they think they’re going to.”

While the 30-month rule is Clark’s general gauge, there are calculators available that will show you exactly what your break even point will be and how much money you can save over the life of your loan:

• Bankrate Mortgage Refinance Calculator
• Mortgagecalculator.net Mortgage Refinance Calculator
• NerdWallet Mortgage Refinance Calculator

As you punch your particular numbers into the calculator, you might see what your monthly payment would be if you refinanced into a 15-year mortgage.

Rates for those are even lower (currently averaging 3.08%, according to Zillow), so if you can afford what is likely to be an increase in your monthly payment, you pay off your loan quicker and potentially save even more money over the long haul.

“The huge advantage with a refi is going into a 15-year loan,” Clark says. “If you’ve been in your loan for a while, going into a 15 is the grand slam.”

More Money and Housing Stories From Clark.com:

• How to Save for a House
• How to Buy a House In 9 Steps
• Why you need a Home Fix-It-Fund