How Much Can Refinancing Save You?

Factors influencing savings from refinancing  

When refinancing your mortgage, a few factors could influence your potential savings. Let’s examine them and how they might affect your decision to refinance.

Current interest rate vs. new rate 

Changes in the market and your credit may give you access to rates different from the ones available when you took out your first loan. If interest rates have decreased since you first set up your mortgage, you may be able to lower your mortgage rate if you refinance. 

The same may be true with your credit score as well. If your credit score has improved, and you’ve made your initial mortgage payments on time, you may be eligible for lower rates from your lender, and it might be a good idea to refinance.

Loan term adjustments (shortening or extending)

Changing the length of your mortgage can also affect your refinance savings. If you entered a 30-year mortgage and now want to refinance for a 15-year, a refinance could save you money in interest payments over time since interest can build up significantly with the extra years in the longer-term mortgage.

On the other hand, if you are currently in a 15-year mortgage and want lower monthly payments, it might be wise to refinance for a 30-year mortgage. This may help free up some funds in the short term. However, you may need to pay more interest down the line. 

When refinancing helps you save 

There are a few important signs that indicate you might be in a good position to save with a refinance. 

80/20 rule

For a conventional refinance, you typically need at least 20% equity in your home or a loan-to-value (LTV) ratio of 80%. Your LTV refers to how much you’re borrowing versus how much your home is worth. It’s a common metric used for approving your refinance.  

Six-month rule

Another factor is how long you have had your current mortgage. Lenders often require you to have your mortgage for at least six months before you refinance. This is known as the six-month rule. It shows that you have been making payments on time for at least that period.  Keep in mind that some lenders, like Discover® Home Loans, will only originate one 1st lien mortgage per property per 12-month period.

1% rule

It can also be helpful to understand a general rule of thumb known as the 1% rule, which states that if you can obtain a 1% decrease in your interest rate, a refinance may be beneficial for your savings over time. 

The current economy can also affect how much of a decrease in your rate you can access with your refinance. Fannie Mae and the Mortgage Bankers Association have predicted that rates will close out the year at 6-7%. The market can be hard to predict, but if these projections show that you could decrease your interest rate by at least 1%, refinancing soon might be a good idea. 

Break-even point 

Your break-even point is how long it takes you to offset the closing costs of a refinance with monthly payments.

After you’ve been approved for your refinance and start to make payments, you can expect to see savings after reaching your break-even point. That means calculating your break-even point can play an important role in understanding the timeline of your potential savings. 

When refinancing might not save money  

If mortgage interest rates have not dropped much or your credit and income have not improved since your first mortgage, you might not see savings with your refinance.   

You also might not want to consider refinancing your home if you plan to sell it soon or are halfway through your current mortgage. 

If you’re selling it soon, it’s unlikely that you’ll reach your break-even point before you sell your house, so paying off your closing costs might outpace your savings timeline.   

If you’re more than halfway through your first loan, you’re likely paying off more of the mortgage principal now, and refinancing would mean you would start paying higher interest again on the new mortgage.