Mortgage rates: Despite low-interest rates, not all homeowners are refinancing. Should you refinance now?

Patrick Naughton describes himself as "house poor."

In 2001, when he bought a ranch home for $336,500 in Braintree, Massachusetts, Naughton hoped he could pay off his 30-year mortgage by retirement and own his home outright.

“In a perfect world I would have had 10 years left on my original loan,” he says. “But life throws a lot of curveballs.”

A divorce spun Naughton, 53, who raised his six children as a single dad, into a financial mess that almost cost him his house. While he managed to hold on to it, he could barely make a dent in his loan amount despite working two jobs.

Then early this year, he decided to take advantage of the pandemic-induced historically low-interest rates and refinance his mortgage. He switched from a 15-year mortgage he’d signed up for in December 2018 to a 30-year mortgage, reducing his interest rate from 3.75% to 2.6% and cutting down his monthly payment by $900. His closing costs came to $2,500.

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From April 2020 through the end of March 2021 around 10.7 million – or 20% of homeowners with mortgages – have refinanced their loans. At the same time, 14.1 million homeowners, or one-quarter of all borrowers who are strong candidates for refinancing, are currently not taking advantage of the low-interest rates, which hit 2.86% this week, according to an analysis provided to USA TODAY by Black Knight Inc, a mortgage data and technology company.

Black Knight defines these borrowers as 30-year mortgage holders who are current on payments, have good credit (720 plus) and have at least 20% equity in the home.

These 14.1 million borrowers could save an average of $286 per month, the analysis found.

There are another 22.7 million borrowers who are considered “in the money” (meaning they have mortgage rates at least 0.75% above the prevailing rate, but do not meet all of Black Knight's broad eligibility criteria).

On average, homeowners who refinanced their 30-year fixed-rate mortgage in 2020 saved more than $2,800 annually and reduced their interest rate by a full percentage point, according to Freddie Mac.

However, even though a higher proportion of Black and Latino borrowers have a financial incentive to refinance, they do so at substantially lower levels than white borrowers, according to a study by Freddie Mac conducted earlier this year.

The study, based on 30-year fixed-rate loans that were active in January 2021 and funded by the mortgage giant, found that 50% of Black and Latino borrowers could save at least $100 a month from refinancing at current rates. That number was 38% for white borrowers. However, only 19.6% of Black borrowers and 23.4% of Latino borrowers had refinanced compared with 32.1% of white borrowers.

There are a lot of borrowers who potentially could save quite a bit by refinancing, says Len Kiefer, deputy chief economist at Freddie Mac.

"The rates have fallen enough that it could well be that borrowers who even refinanced a year ago could benefit from refinancing," he says.

More than one-quarter of current mortgage holders (27%) don’t even know their current rate, putting themselves in a poor position to determine if refinancing is worth it, a November survey conducted by Bankrate found.

“If your current mortgage rate is 3.5% or higher and you plan to be in your home more than two to three years, then you need to at least look into refinancing,” says Greg McBride, Bankrate chief financial analyst. “With most borrowers that have strong credit locking in 30-year rates below 3% and the ability to roll closing costs into your loan in many cases, you could reduce your monthly payments without any out-of-pocket expense.”

The reasons cited by homeowners for not refinancing included a belief that they wouldn’t save enough money (33%); high closing costs (23%); too much paperwork and hassle (22%) and low credit score (10%).

Naughton, a commercial painter, says his finances took a hit last year when many offices shut down during the pandemic.

“I couldn’t make my $2,750 mortgage every month without any overtime,” he says. “It was a struggle.”

That’s when he came across Own Up, a mortgage technology company that helps customers shop for mortgages and compare mortgage rates from regional lenders.

While his outstanding mortgage still stood at $335,000, the home had gone up in value by nearly $300,000. He said he received five offers with different terms. He chose one that allowed him a cash-out refinance and the ability to use $40,000 of it to help with his youngest daughter’s college costs.

McBride offered a couple of scenarios when refinancing could make sense:

For example, say a person took out a 30-year, $300,000 loan six years ago at 4%, and has current monthly payments of $1,432 and a remaining balance of $265,000. If they refinanced now at 2.875%, rolled in $5,000 of closing costs so their new balance is $270,000, the monthly payment of $1,120 will save them $312 per month and they can recoup the closing costs in 16 months.

And if they didn’t want to stretch that loan balance back out to 30 years, they could refinance into a 20-year loan at 2.25% (rolling in the costs so the new balance is $270,000). Their monthly payment essentially stays the same but they are able to pay off the loan four years earlier.

Borrowers should also shop around and get quotes from three different lenders, says McBride.

“Don’t just focus on the interest rate, but also look at the fees being charged,” he says. “Shop around for title insurance and ask for the substitution or reissue rate as this can be a big savings.”

If you expect to move within the next two to three years, have only a few years left on your original loan, or have a loan balance under $50,000, then refinancing might not make sense, says McBride.

Here are six things to consider if you are thinking of refinancing your mortgage, provided by Patrick Boyaggi, co-founder and CEO of Own Up, and Len Kiefer, economist at Freddie Mac.

Mortgage interest rates vary

“The rate and fees offered on your mortgage can vary widely from lender to lender. The difference between the high end and low end of the range equates to tens of thousands in interest over the life of your loan. Very few borrowers understand this,” says Boyaggi.

Shop around when refinancing

As part of the estimates, lenders are required to give potential borrowers the estimates of what those costs will look like.

"Our research has shown that borrowers should really try to know the marketplace and try to understand what their options are," says Kiefer.

Shopping is a way to empower yourself and increase your chance of securing a rate and fee combination at the low end of the range. The more your shop, the better your expected outcomes are.

When refinancing makes sense

"A simple thing a borrower could do as a break-even analysis. Find out how much they're actually going to have to pay in terms of upfront costs to do the refinance and compare that against their reduction in their monthly payments. The lender should be able to provide all that information to figure out sort of how long it would take to break even," says Kiefer.

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Shopping for a mortgage can be extremely time-consuming. A digital marketplace, like Own Up, can make it easy for borrowers to navigate a variety of lenders, compare rates and make better home financing decisions, even if they decide to refinance elsewhere.

Reduce monthly payments by extending loan term

If your goal is to reduce your monthly expenses, refinancing and extending your loan term will lessen those monthly payments.

"And lowering your interest rate by 0.25% or more can result in substantial savings – saving you up to tens of thousands of dollars over the life of the loan," says Boyaggi.

Consider your timeline: How long will you be in the house?

Boyaggi says a refinance that does not cut monthly costs but shortens the loan term by many years will save you money over time, especially if you plan to be in your home for several years. If you plan to move sooner, however, be aware of your break-even timeline as it doesn’t make sense to sell your home before that date.

Swapna Venugopal Ramaswamy is the housing and economy reporter for USA TODAY. Follow her on Twitter @SwapnaVenugopal

This article originally appeared on USA TODAY: Refinance mortgage rates 2021: Low interest rates can save you money