Mortgage rate drop opens door for homebuyers to refinance, save money

Mortgage rates have dropped to their lowest level since February.

The shift is an opportunity for new homebuyers, but it’s also a chance for current homeowners to refinance and save some money .

“Mortgage rates have come down pretty significantly,” says Bankrate analyst Jeff Ostrowski, “you’re definitely going to save some money.”

For families like Ben and Haley Williams, the hope is lower rates will help the household budget. They bought a home last December with a mortgage rate of 8.1 percent.

“Only $176 went to principal last month, and so over $2,000 was interest and taxes and insurance”, says Haley Williams.

Now, with rates averaging 6.3 percent for a 30-year fixed mortgage, there’s finally a growing opportunity to refinance at a lower rate and save on their monthly house payment.

But Ostrowski says, refinancing isn’t free, and the cost of fees has to be considered.

“That’s why homeowners don’t refinance when rates fall a quarter point, or half a point, because you have to absorb those closing costs,” says Ostrowski.

Refinancing basically amounts to taking out a new mortgage.

These costs can run between 2 percent and 5 percent of the amount you refinance.

“Usually it takes a couple of years of lower payments to make up for those fees that you have to pay when you refinance your mortgage,” says Ostrowski.

For example:  if you have a $400,000 loan at 8 percent and the monthly payment is $2,935, and you can cut the rate to 6.5 percent, your payment falls to $2,528

That’s a savings of $407 a month.

Assuming you’ll incur $10,000 in closing costs on a refinance, you’d need about two years to recoup those costs in the form of lower payments.

Also, if you were a first-time homebuyer with an FHA loan -- refinancing can offer an additional benefit.

“If you built up some equity in your house, this is an opportunity for you to refinance and get out of paying that mortgage insurance,” says Ostrowski, “that’s one little wrinkle that can sway the calculation beyond just the difference between your old rate and your new rate.”

And if the Fed keeps cutting, Ostrowski believes mortgage rates could go below 6 percent next year, so there could be a big benefit to waiting just a little longer.

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