Does It Pay To Refinance Yet? Here's How To Do The Math

The Mortgage Bankers Association's refinance index was up 16% the week of August 9  and was at the highest level in two years. The average 30-year loan last week fell to 6.47%, the lowest level in over a year. But does it pay to refinance now, as opposed to waiting for even lower rates?

The 30-year loan reached a 23-year high of 7.79% in October 2023. However, home sales also hit an annual low that month. So, there are not many homebuyers who took a 7.79% mortgage. That means that most of the people refinancing a loan today have an interest rate below that. But let's use that 7.79% number to calculate the savings from refinancing because that will show the most that can be saved.

Trending Now:

• Don’t miss out on the next NVIDIA – you can invest in the future of AI for only $10.
  **This is a paid advertisement. Carefully consider the investment objectives, risks, charges and expenses of the Fundrise Innovation Fund before investing. This and other information can be found in the Fund's prospectus. Read them carefully before investing.
• Get ‘em while you can — investing in this asset class may be reaching a high-water mark but you can still make returns right now.

On a $400,000 loan with a 7.79% mortgage, the Principal and Interest (P&I) payment is $2,877 a month. If one refinances that amount at 6.47%, the monthly cost drops $357 to $2,520. That sounds great, right? But now one has to factor in the closing costs. According to Freddie Mac, closing costs on a $400,000 refinance would be $10,012. Therefore, it will take approximately 28 months before one breaks even on the refinance. After that, it's all savings.

But don't forget, almost a year of P&I payments has already been made and now the borrower has to start anew with another 30-year term. Along with closing costs, that's another minor detail that Realtors and Mortgage companies don't like to bring up when they say, "You can always refinance", trying to convince someone to buy a home during a high interest rate period.

Given the likelihood of upcoming interest rate cuts in 2024, waiting a few more months to refinance seems prudent. If the 30-year loan declines to 5.75%, the monthly P&I drops to $2,334, a savings of $543 per month. The closing costs are the same, however, the break-even point would decline to 18.4 months.

Read More:

• A billion-dollar investment strategy with minimums as low as $10 — you can become part of the next big real estate boom today.
  This is a paid advertisement. Carefully consider the investment objectives, risks, charges and expenses of the Fundrise Flagship Fund before investing. This and other information can be found in the Fund's prospectus. Read them carefully before investing.
• With returns as high as 300%, it’s no wonder this asset is the investment choice of many billionaires. Uncover the secret.

Here's one more option, and while it might seem difficult, it can save the borrower an incredible amount of money in the long term. The trick is to refinance a high-interest 30-year loan onto a 15-year loan with a much lower interest rate. 15-year loans are typically .50% to .75% below the 30-year loan. The latest national average rate of a 15-year loan is 5.99%, but what if it drops to 5% within a few months?

At 5.00%, the 15-year loan on $400,000 would cost $3,163 a month, but that's only $286 monthly more than the 30-year payment at $7.79%. However, by paying off the mortgage over 15 years, the borrower saves $466,245 in total lifetime payments! And the closing costs are $9,767, a savings of $245 compared to the 30-year refinance.

Imagine the investments one could make with $466,490, instead of spending it on a mortgage.

You Can Profit From Real Estate Without Owning Property

The current high-interest-rate environment has created an incredible opportunity for income-seeking investors to earn massive yields and you don't have to own property to do it…  

The Arrived Homes investment platform has created a Private Credit Fund, which provides access to a pool of short-term loans backed by residential real estate with a target 7% to 9% net annual yield paid to investors monthly. The best part? Unlike other private credit funds, this one has a minimum investment of only $100. 

Don't miss out on this opportunity to take advantage of high-yield investments while rates are high. Check out Benzinga's favorite high-yield offerings.