Mortgage Rates Are Low — Should I Refinance Before It’s Too Late?

Homeowners looking to lower their monthly housing payments or tap into their home equity have been refinancing in droves, hoping to take advantage of historically low mortgage rates. 

For most of 2021, mortgage rates on 30-year, fixed rate mortgages hovered around 3%, dropping at times into the mid-2%, according to the Freddie Mac Primary Mortgage Market Survey®, which analyzes residential mortgage rate averages since 1971.  (See here for up-to-date rates and comparison charts).

Rates jumped about a half a percentage point in the first month of 2022, according to Zillow data, and are expected to increase further as the Federal Reserve seeks to curb inflation.

Why are rates expected to rise?

A strong economy, low unemployment, high demand for consumer goods and lingering supply chain issues from COVID-19 have contributed to rising prices, or inflation. The Federal Reserve, the nation’s central bank, can try to curb inflation by raising a key interest rate, which can influence rates on consumer financial products, including mortgages.

No one knows how much interest rates are likely to rise. Rates were much closer to 5% as recently as late-2018, and they consistently hovered between 7% and 8% for much of the 1990s. By comparison, today’s rates are still historically low.

Are there other things that can determine my mortgage interest rate?

Your credit score plays a big role in the rate you pay. Customers who have excellent credit scores and more equity in their homes are likely to qualify for the best rates. That’s especially true if they’re seeking the most common conventional  mortgages — namely, conforming 30-year, fixed-rate mortgages.

A conforming mortgage is one that falls under a set dollar limit. The limit varies year-to-year depending on home values in your county. Anything over that limit is considered a jumbo mortgage. A fixed-rate mortgage is one where the interest rate remains the same for the entire length or term of the loan.  

Should I refinance?

People refinance their mortgages for lots of reasons: lowering monthly payments, changing the length of a loan, or tapping home equity to pay for home improvements, education or some other purpose.

Whether it makes sense for you to refinance depends on the interest rate on your current mortgage, the interest rate on the one you expect to get, the cost of the loan and your financial goals. 

Getting a lower interest rate is the most popular reason to refinance a mortgage. It simply means you are swapping a higher interest rate for a lower one, which can save you money on your monthly mortgage payments.

Borrowers who put down less than 20% on their home purchase could save even more if their equity — their share of ownership in their home — has increased to more than 20%. Having that level of equity allows people to borrow without having to pay for private mortgage insurance, which adds about 0.98% to the borrowing rate.

To explore how changes in interest rates could affect what you pay each month, check out this refinance calculator.

How much more would I spend each month if I waited to refinance?

That depends on how much a lender charges in closing costs, and how much interest rates rise.* A half-point increase in your mortgage interest rate — say, from 3.5% to 4% — would increase your monthly mortgage payment by about 6.5%. 

For instance, if rates on a 30-year, $300,000 mortgage increased from 3.5% to 4%, the share of your monthly mortgage payment that goes to principal and interest would increase from $1,347 to $1,432 — or $85 more a month. 

If the rate increased a full point, from 3.5% to 4.5% on that same mortgage, your payment would rise from $1,432 to $1,520, an increase of $173 a month.

The higher payment may not add up to much on smaller home loans on a monthly basis, but can add up quickly for larger mortgages.

Talk to a mortgage lender to learn more about your refinancing options.

Additional mortgage and refi resources

• To see how different rates can change your monthly payment, check out our refinance calculator. The calculator also can give you a more complete picture of how your payments could change under different scenarios. 
• To learn how other costs associated with a loan can affect the total interest rate, see this article on 4 Reasons to Refinance in Zillow’s Mortgage Learning Center.
• Compare up-to-date interest rates across a variety of lending programs in Zillow’s Mortgage Learning Center.

*The following examples are for illustrative purposes only and do not factor in lender closings costs, taxes and insurance. Actual payments will vary based on your individual situation.  

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