Is now the best time to refinance your mortgage?

A mortgage refinance can save you money but run the numbers first. (iStock)

The coronavirus pandemic has many Americans rethinking their budgets as unemployment rates climb. One potential silver lining is the effect on mortgage rates, which have dipped to record lows thanks to declining bond yields. Now could be an opportune time to consider a mortgage refinance to take advantage of lower interest rates. If you're looking for a way to save on mortgage costs, here are four things to keep in mind.

Shop around for the best mortgage rates

If one of your main goals in seeking a mortgage refinance is finding the lowest interest rates, it pays to do some comparison shopping. When it comes to refinance rates, mortgage lenders aren't all alike.

When comparing refi rates, don't be afraid to cast the net wide and consider traditional banks, credit unions and online refinance lenders. If you don't know where to start with sizing up mortgage rates, using a tool like Credible can make it easier. Credible finds the best refinance rates for you so you can choose the refinance loan that fits your needs.


Estimate your home refinance savings

A mortgage refinance can make sense when interest rates are low but it's still important to do the math on how much you could save. Your potential refinance savings can hinge on your new interest rate versus the old one, the length of your new mortgage term and how much you'll pay for closing expenses. Find your rate now by inserting some information into Credible's free online tool.


Here's an example. Say that you're five years into a 30-year mortgage that carries an interest rate of 4.56 percent. Your outstanding loan balance is $200,000 and you want to refinance to a new 25-year loan. If you qualify for a 3.10 percent rate, refinancing would save you $62 a month and $13,588 over the life of the loan.

That's with paying $6,000 in closing expenses out-of-pocket. So in this case, a mortgage refinance could be a good option. But when the costs are higher or you don't qualify for the lowest mortgage rates, it could end up being a wash.

Find the break-even point

Closing expenses are part of the home refinance process, the same as they are when purchasing a home. According to Credible, it's typical to pay between 2 and 5 percent at closing for a mortgage refinance.

The break-even point is when you've saved enough money in interest by refinancing to justify the closing payments you made. Going back to the previous example, you'd have to pay on the new loan for 97 months to reach the break-even point and recoup the $6,000 in closing costs.

One question you may have is whether it makes sense to roll closing costs into a refinance loan. While your lender may allow that, there are pros and cons.

On the pro side, you're not paying these costs out-of-pocket so you save money initially. But rolling them into the loan can eat away at your monthly and long-term savings. In the example scenario, rolling the $6,000 in closing costs into the loan would cut your monthly savings down to $33 and your lifetime savings to $10,960. So you'd have to think carefully about where you most need or want to reap the benefits when trying to save on mortgage costs.

Compare refinance loan terms

The final piece of the refinance puzzle is choosing a new loan term. There are three scenarios here:

Refinancing to a shorter mortgage term

Refinancing into a longer mortgage

Refinancing to a term equal to what's left on your existing mortgage

Choosing a shorter refi term could increase your lifetime savings since you're making fewer principal and interest payments. But it could raise your monthly payments significantly.


Let's look once more at the previous refinance example. Instead of choosing a 25-year mortgage, assume that you choose a 20-year term instead. Your lifetime savings increases dramatically to $30,571. But your monthly payments also increase from $988 to $1,153, a difference of $165.

The pros of choosing a shorter term are saving even more money on mortgage costs and clearing the mortgage faster. The con, however, is potentially ending up with a payment that's unsustainable for your budget.

The bottom line

If coronavirus has affected your personal finances, a home refinance could provide some relief. Having a full picture that includes both costs and savings can help you decide if it's the right move. For more on refinancing and to compare refinance rates, visit Credible to weigh your options.