When is the Right Time to Refinance Your Mortgage?

For many homeowners, the mortgage payment is one of their largest expenses. With mortgage rates declining, there could be a significant opportunity to lower monthly payments.

One side effect of the COVID-19 pandemic has been a drop in government interest rates. This has also impacted mortgage rates as the average 30-year fixed mortgage rate recently fell to a 50-year low1. These lower rates may present an opportunity for homeowners to lower their payments or reduce their loan term through refinancing their mortgage. Homeowners may be wondering if mortgage rates will continue to fall and if this is the right time to refinance.

What Drives Mortgage Rates?

Although mortgage rates have reached the lowest level in history for certain types, you may be wondering whether these rates go even lower. The direction of mortgage rates is difficult to predict in the short term as there are many factors that drive mortgage rates.

Mortgage rates are typically compared to government bond rates. 30-year mortgage rates are often benchmarked against the 10-year Treasury yield. When thinking about what drives Treasury yields there are multiple factors. These include monetary policy and expectations around economic growth and inflation, along with technical market factors.

However, the level of mortgage rates versus Treasury yields can vary over time. With Treasury rates falling to historic lows, the difference between mortgage rates and Treasury yields has spiked recently. Strong demand from homeowners to refinance has outweighed the supply from lenders, which pushed mortgage rates up. This has been offset somewhat by government buying of mortgage-backed securities; however, mortgage rates are not as low as some may have expected.

While mortgage rates could go lower, the future direction of mortgage rates is unknown. So, if a homeowner can meaningfully reduce their mortgage payment by refinancing at current levels, it is worth considering.

Should You Refinance Your Mortgage?

When looking at refinancing, there are a few factors to consider:

Size of Change in Payment or Reduction in Loan Term – By refinancing your mortgage at a lower rate, you are able to reduce the amount you are paying each month assuming the term of your mortgage stays the same or is extended. The difference between your new interest rate and the old rate along with the change in the term of the loan will determine how your payments change. While a large change like a 1% decline will likely make sense, a 0.25% decline may not be worth refinancing due to the costs of refinancing.

Cost of Refinancing – The costs of refinancing can range from 2% to 5% of the loan value2. These can include fees for appraisal, home inspection, mortgage origination, title insurance, brokers, and mortgage insurance, among other things. The amount of these fees can vary depending on your loan type, the state where you live and the mortgage lender you use.

How Long You Plan to Live in the Home – Although refinancing may sound like an obvious choice with rates where they are, homeowners need to consider how long they plan to stay in their home. Paying closing costs of $5,000 or $10,000 may make sense if you are confident you will be in your house for 10 years. However, if you may move in the next few years for work or a new phase of life, the monthly savings may not offset the cost of refinancing.

To determine your near-term cash flow breakeven, divide the amount of the total closing costs by the change in your monthly payment. For example, if your closing costs are $5,000 and your monthly savings are $250, the payback period is $5,000/$250 = 20 months. If you are planning to stay in your home longer than 20 months, the difference in monthly payments will offset the cost of the refinancing. However, it is also important to consider the change in the term of the mortgage. For example, if you are extending your mortgage, it is important to consider the additional number of payments you will have to make.

Your Financial Condition – When you refinance, the lender will need to approve you based on your credit score, income, and assets, among other things. To qualify for the lowest rate, these will need to be in good shape. If you recently started a new business or if one of the spouses has stopped working, the amount you are approved for could be lower than what you had been approved for previously.


With the recent move lower in mortgage rates, refinancing could make sense for many homeowners, even if their current mortgage is only a year or two old. At current levels, it is worth running the numbers to see if this opportunity makes sense for you. If you would like to talk to a financial planner about how your mortgage fits into your overall financial picture, please schedule a call.