2020 wasn’t the best year for many things but it was a great year for mortgage interest rates. You mortgage interest rate probably isn’t something you think about daily but it matters, a lot.

If you have a 4% interest rate on a $200,000 mortgage, you will pay $143,739 in interest. With a rate of 2.75%, you’ll pay $93,934. That’s a savings of $49,805!  That’s not considering paying any extra, just the regular payments you make.

The good news is that no matter when you bought, you can get some of the lowest rates we’ve ever seen right now!  For most buyers that is around 2.2-2.95% depending on your loan.

Put those savings into a retirement account every month and you can retire with an extra $195,630.63  (but that’s a post for another day).

Refinancing can sound overwhelming and confusing but it’s really pretty simple. You basically go through the same process you went through initially when you first purchased your home. I’m going to walk you through it step by step.

Step 1 – Should You Refinance?

Refinancing doesn’t make sense for every person. Refinancing will cost you several thousand dollars (which can be added onto your total loan amount and not paid upfront), so based on how much you owe, your current interest rate, and how much time is left in your mortgage it may not be worth it. This is the calculator I recommend using to see what makes sense for you.

Things to consider:

1. How long do you plan to stay in your home? For me, it will take almost 2 years for the savings to be more than the cost of refinancing. I plan to live here for at least that long so it’s no issue for me.
2. Will you qualify to refinance? This will take into account how much the home is worth, your income, and your credit score. Being able to make monthly payments on your current mortgage does not guarantee you’ll qualify for it again.

Side note: I personally do not recommend cashing out equity when you refinance to pay off other consumer debt. Credit Cards are unsecured debt, meaning if you don’t pay them you get sent to collections and have to deal with calls and letters but that’s the extent of it.  They will keep hounding you but not take anything from you.  A home loan is secured debt, if you fail to pay you lose your house.  So while you are moving the debt to a lower interest rate, you are really making it more costly for you if something happens and you can’t pay.

Step 2 – Pick Your Mortgage Length

To see the most dramatic decrease in monthly payment, you’ll want to stick with a 30 year mortgage. This also results in paying the most interest. For another option, you can ask your loan officer to match your current mortgage length. So, if you have 25 years left on your mortgage, ask to refinance with a 25 year mortgage.

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