Why Mortgage Interest Rates Are Low

According to data from S&P Global, the average interest rate for a 30-year fixed mortgage was 2.98 percent in February 2021. That’s exceptionally low thanks in part to low federal interest rates and other appealing economic indicators. Banks set their mortgage rates based on the markets — when interest is cheap, mortgages are usually inexpensive, too.

However, mortgage rates also change regularly, and they’re not necessarily tied to the federal interest rate. According to the Mortgage Bankers Association, the number of mortgage and refinance applications is falling, and interest rates are beginning to climb.

For homeowners, that means that historically low interest rates won’t last forever — and if you’re thinking about refinancing your home, you’ll need to shop around to find the best possible deal.

Deciding When to Refinance Your Home

Refinancing can save you thousands of dollars over the course of your mortgage and help you pay off your home. However, if you can’t improve your APR (Annual Percentage Rate) substantially or reduce your loan term, refinancing could actually cost you money. The process is also time consuming, though online lenders make applications easier for homeowners by handling some of the paperwork online.

The first (and most important) step is to collect quotes from different mortgage companies. Don’t complete applications right away — get basic quotes, using online resources to find lenders that advertise refinancing. After reviewing your options, ask yourself several questions:

What do I want to get from refinancing?

If you’re hoping to get cash for home repairs or other purposes (a “cash-out" refinance), you’ll need a different mortgage than someone who’s simply trying to lower their APR. Likewise, if you currently have a variable-APR mortgage, your primary goal might be to switch to a fixed interest rate, which would keep your payments consistent in the future when interest rates rise.

By understanding your goals, you’ll be able to evaluate options more effectively. You’ll also be able to determine whether refinancing makes sense for your current financial situation.

What will I pay to refinance?

When you refinance, you’ll typically pay closing costs. These can run from 2 to 5 percent of the total value of your loan. While your monthly payments might decrease substantially, make sure that the lower payments will justify the closing costs. If possible, try to pay the closing costs upfront. Rolling the closing costs into your mortgage will cost you money over time.

How much can I afford to pay per month?

By reducing the length of your mortgage (for instance, moving from a 30-year fixed mortgage to a 15-year fixed mortgage), you can save a tremendous amount of money. However, your monthly payments will usually go up — you’ll simply pay off your home more quickly and with less interest. Honestly assess your finances to decide whether you could handle a larger payment.

Of course, many homeowners simply want to reduce their monthly payments by paying less interest, and there’s certainly nothing wrong with this approach. Remember, there’s no “right" or “wrong" time to refinance; if you can find a much better mortgage, refinancing is a smart financial decision.

Researching Mortgage Companies Online When Refinancing

While mortgage rates are currently low nationwide, you might see extremely different offers from different lenders. That’s because mortgage companies look at a variety of factors to determine APRs for prospective borrowers. That includes your credit score, your debt-to-income ratio, your current income, your equity, and dozens of other criteria.

In other words, you’ll need to shop around to find the best possible interest rate (or the lowest monthly payment, depending on your financial goals). One Freddie Mac study found that a borrower could save an average of $1,500 over the life of their mortgage by getting one additional rate quote, but according to that same study, only half of homeowners compared rates.

Don’t make that mistake. Look online for at least 3-4 lenders and get basic quotes. Collect some information about your current mortgage before starting your search to make the process easier.

Research each company carefully and read the fine print. Consider closing costs and other expenses when making comparisons, and do some quick calculations to find out how much you’ll save with each option. Remember, hard work pays off — especially when you’re refinancing.