My mortgage is small and my interest rate is below 4% — would a refinance be worth it?

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The Credible Money Coach explores the benefits and disadvantages of refinancing a small mortgage. (Credible)

Dear Credible Money Coach,

I currently have a 30-year loan with a 3.375% interest rate. I am nine years into the term and have excellent credit. I owe approximately $54,000. Would it be worth refinancing? — David

Hello David, and thanks for your question. Many homeowners are in the same situation right now, wondering if they should refinance their mortgages.

To answer your question, we need to consider current mortgage refinance rates, how they may change in 2022 and your current rate.

Refinance rates as of January 2022

For much of 2021, mortgage rates for purchases and refinances were at historic lows. In March 2021, a year after the pandemic first hit the U.S., 30-year fixed-rate mortgage refinances averaged 3.098%, according to data compiled by Credible. But that was the average, and for several days that month, the rates dipped below 3%!

In September 2021, rates began to move up. By December, the average rate for 30-year refinances climbed to 3.132%, which was still a great rate.

Before the pandemic, mortgage purchase rates were significantly higher than today. Data from Freddie Mac shows that in March 2019, the average 30-year fixed-rate mortgage was 4.27%, with 0.5 points, making the effective interest rate nearly 5%.

The possible future for rates

Mortgage experts predict that rates will rise in 2022, although predictions vary on how significant the increases will be. Some noteworthy projections for 30-year fixed-rates include:

4% by the end of 2022 — The Mortgage Bankers Association
3.5% average for all of 2022 — Nadia Evangelou, senior economist and director of forecasting at the National Association of Realtors®
3.4% in the fourth quarter of 2022 — Fannie Mae
3.5% average for all of 2022 — Freddie Mac

Would it be worth it to refinance your mortgage?

The mortgage interest rate is just one factor in determining whether a refinance would benefit a borrower. Also, consider the refinance closing costs by reviewing good faith estimates from potential lenders. And know how long you plan to stay in your home — the longer you keep a refinanced mortgage, the more it pays off.

If you took out your mortgage in 2012 at 3.375%, it was a good rate at the time. It’s not much higher than the going rate you could get today for a refinance.

A general rule of thumb is to consider refinancing when you can reduce your interest rate by at least 0.75%. Therefore, refinancing into a 30-year term doesn’t make sense for you since the difference between your current mortgage rate and the average 30-year refinance rate is considerably less.

However, if you can handle a higher monthly mortgage payment, refinancing into a shorter repayment term would save interest over the life of a new loan. In December 2021, the average 15-year refinance rate was 2.375%, and the average 10-year rate was 2.330%. Refinancing into either of those terms in December would have cut your rate by at least 1%, saving money.

The bottom line

If you’re able to get approved for a mortgage refinance that’s at least 0.75% less than your current rate, and you can afford the closing costs, it may be worthwhile.

But since your mortgage balance of $54,000 is relatively low, it may be challenging to find a lender willing to work with you. That’s because refinancing a low mortgage balance isn’t as profitable for a lender as a higher amount.

If your goal is to reduce your total interest or pay off your house sooner, consider paying off your mortgage ahead of schedule. For instance, you could pay more toward your principal balance each month or send an extra payment each year.

Reducing your repayment time can significantly cut your interest, potentially saving thousands of dollars over the life of the loan. Just be sure your lender knows to apply extra payments to your principal. Otherwise, they may hold it in escrow, which won’t help you save money.

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Need Credible® advice for a money-related question? Email our Credible Money Coaches at moneyexpert@credible.com. A Money Coach could answer your question in an upcoming column.

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About the author: Laura Adams is a personal finance and small business expert, award-winning author, and host of Money Girl, a top-rated weekly audio podcast and blog. She’s frequently quoted in the national media, and millions of readers and listeners benefit from her practical financial advice. Laura’s mission is to empower consumers to live richer lives through her speaking, spokesperson, and advocacy work. She received an MBA from the University of Florida and lives in Vero Beach, Florida. Follow her on LauraDAdams.com, Instagram, Facebook, Twitter, and LinkedIn.