Many homeowners might be unaware that mortgage rates have declined so dramatically that they could save money by refinancing.

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Mortgage rates have fallen so much lately that millions of homeowners might benefit by refinancing — even if they bought a home just last year. A typical refinancer could save more than $150 a month.

Some homeowners have gotten the message: Refinance applications have almost doubled compared to a year ago, according to the Mortgage Bankers Association. But many homeowners might be unaware that mortgage rates have declined so dramatically that they could save money by refinancing.

Many potential refinancers

One rule of thumb says to consider refinancing if you can cut the mortgage rate by three-quarters of a percentage point. By that measure, 5.9 million homeowners could benefit by refinancing into today’s mortgage rates, according to Black Knight, a technology, data and analytics provider for the mortgage industry. About 953,000 of those potential refinancers got their mortgages in 2018, the company says.

This refinancing opportunity has arrived because mortgage rates have been falling for about seven months. Not a lot of press attention has been paid to the decline, so it might catch some homeowners by surprise. The 30-year fixed rate recently reached its lowest levels since September 2017.

The downward movement has resulted in a dramatic difference in mortgage rates compared to late 2018. The 30-year fixed-rate mortgage averaged 3.82% in mid-June this year, according to Freddie Mac. The week before this past Christmas, it averaged 4.62%. That’s a decline of a little more than three-quarters of a percentage point — enough of a difference to make it worthwhile to look into refinancing.

People who bought homes from late summer to late fall 2018 might be in a position to refinance. Each week from Sept. 13 to Dec. 20, 2018, the 30-year fixed rate averaged 4.6% or higher.

You can save a lot

The average size of a refinanced mortgage was $386,800 in the first week of June, according to the Mortgage Bankers Association. On a loan of that amount, the difference between a 4.75% rate and a 4% rate is $171 a month ($2,053 a year) in principal and interest, rounded to the nearest dollar.

To find out how much you could save:
  • Look at your loan paperwork to see what interest rate you’re paying, and then check out today’s refinance mortgage rates to see the difference.
  • Get an estimate of the fees you’ll pay for your refinance using a closing costs calculator.
  • Finally, calculate your potential savings using NerdWallet’s refinance calculator.

If the numbers look promising, you’ll want to estimate your break-even period: the time it takes for the accumulated monthly savings to exceed the loan fees. For example, if you pay $4,500 in fees to save $150 a month, it will take 30 months to break even ($4,500 divided by $150 equals 30). If you believe you’ll stay in the house beyond the break-even period, it might be worthwhile to refinance.

Tips for the best refinance

In most cases, you can refinance whenever you want, although some lenders require “seasoning" between mortgages, requiring a certain period to pass between appraisals.

You don’t have to start all over again and refinance for 30 years, but you may want to if you’d like to lower your monthly payment.

You can refinance to the same payoff date as your current loan, which can be useful when you want to pay off the mortgage before retirement or the kids go off to college. For example, if your 30-year mortgage is exactly 5 years old when you refinance, you can request to pay off the new loan in 25 years. Tell the lender to amortize the mortgage for 25 years (or whatever term you wish).
When they can afford it, many people refinance from a 30-year to a 15-year loan. The shorter loan usually has higher monthly payments, but the interest paid over the life of the loan is much less.

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