Nearly 2.7 million homeowners could save with a refinance. Are you one of them?

Mortgage rates have ticked downward in April, despite the Iran War, a decline that gives nearly 3 million homeowners a chance to lower their monthly payments with a refinance, a Bankrate analysis shows.

The average 30-year fixed mortgage, the most popular type of home loan, has dropped to 6.34%, down 12 basis points since the beginning of the month, according to the latest Bankrate estimates. Mortgage rates, which are primarily tied to the bond market, have steadily eased off their highs for the year as the U.S. and Iran pursue an end to the conflict and hopefully free up shipping lanes that supply 20% of the world’s oil. 

A Bankrate analysis of lending data found about 2.7 million homeowners with a 30-year fixed mortgage could lower their payments by refinancing right now. And for every basis point – or one-hundredth of a percentage point – that the current rate drops, roughly 90,000 more homeowners would benefit from a refinance.

“Twenty-two percent of outstanding mortgages are above 6%, so we know there are a lot of people who are having this conversation right now.” said Joel Berner, senior economist at Realtor.com. “If you’re in the high sevens, I say absolutely go for it [refinancing] right now.”

Here’s what you need to know about refinancing in today’s market.

Refinancing could save homeowners up to $26B over 5 years

Mortgage rates sit at the center of housing affordability, determining what borrowers pay each month. With rates around 6 percent, millions of homeowners who locked in loans above 7% have an opportunity to refinance – potentially unlocking nearly $26 billion in collective savings from lower payments over the next five years, according to Bankrate’s analysis of data from ICE Mortgage Technology, a consulting firm.

Anyone who could save at least 75 basis points on their rate would lower their monthly payment enough to offset the cost of closing on a home refinance, said Andy Warden, head of mortgage and housing market research at ICE Mortgage Technology. 

If rates fall to 6%, a total of 5.3 million homeowners would benefit from refinancing. At 5.88%, that number jumps to 6.3 million homeowners.

“Because of where rate distributions sit, as you get down into the 6% and 5.875% range, you’re picking up bigger chunks of refinancers,” Warden said. 

Ryan Katherine, a 30-year-old in Salt Lake City, isn’t rushing to refinance the home she owns with her partner. She says she’d need to see her 6.625% mortgage rate drop by at least a full percentage point before refinancing. For her, that threshold is tied to her longer-term goal of eventually renting out the home. 

At 5.625%, Katherine figures her mortgage payment would be about the same as the amount she could charge to rent it out, turning her home into an asset that builds equity at no additional cost.

“I really just want a simple cut-and-dry rule to follow, and for me, that means waiting until 1%,” Katherine said. 

Potential savings from refinancing depend on both the magnitude of the rate cut and the size of the loan.

For example, a $399,600 home loan — the average refinance application size — would carry a monthly payment of $2,146 at a 7.09% rate, compared with $1,987 at 6.34%. That’s a difference of nearly $160 per month, or about $1,900 per year.

That amount of savings could pay off the refinancing costs in as little as three years, depending on how much the bank charges to refinance the loan. 

How to decide if a mortgage refinance makes sense for you

While a falling rate can be the catalyst, it isn’t the only variable in the refinance equation. You’ll need to weigh your immediate savings against your long-term plans for the home and the upfront cost of the new loan. Ultimately, the math only works if your monthly savings can eventually outrun your closing costs — a calculation that depends on how long you plan to stay put.

Here’s how to think through the decision, according to housing experts.

1. Determine your incentive rate for refinancing

The lending industry’s rule of thumb is that refinancing may be worth it if your mortgage rate drops by at least 0.75 to 1 percentage point. But, sometimes, even a smaller rate reduction can make sense if you plan to stay in the home for longer. 

On the flip side, a 1 percentage point drop might not be enough if closing costs are high or you expect to move soon. The key is identifying the rate reduction that meaningfully improves your cash flow and moves your longer-term financial goals forward.

“You only want to take the step if you are saving enough,” said Kara Ng, senior economist at Zillow. “Basically, the rate has fallen enough, and or you’re staying in the home for a long time. It never hurts to reach out to your loan officer and see how it pencils out.”

If the math doesn’t check out at today’s rates, don’t immediately cross refinancing off your list. Mortgage rates are constantly fluctuating, so consider keeping an eye on weekly rate moves to identify your best refinance window.

2. Verify your home equity

Your equity position will affect both your eligibility and your rate. Depending on the loan type, you may need 5% to 20% equity to qualify. Borrowers with at least 20% equity typically secure better rates and avoid private mortgage insurance, while those with less may face higher costs or additional requirements. 

“If you bought with less than 20% down a long time ago and your equity has gone up, if you refinance, you could potentially eliminate the mortgage insurance,” Ng said.

3. Weigh the fees

Refinance closing costs typically range from 2% to 6% of the loan amount and may include lender fees, appraisal costs and title insurance. Some lenders advertise “no-closing-cost” refinances, but those often come with a slightly higher interest rate. Make sure you understand what you’re paying upfront and what trade-offs you’re making. 

“Don’t just take a look at the mortgage rate they offer,” Ng said. “Take a look at the closing costs.”

4. Calculate your breakeven point

Your breakeven point is how long it takes for your monthly savings to outweigh the upfront costs of refinancing. To find it, divide your total closing costs by your estimated monthly savings. If it would take three years to break even,  but you plan to move in two, refinancing likely doesn’t make financial sense. If you’d rather not do the math yourself, our Bankrate mortgage refinance breakeven calculator can walk you through it. 

5. Pick your loan type based on your goals

You may choose to reset the clock on your 30-year mortgage to lower your monthly payment, shorten your loan term to pay off your home faster or tap into your home equity with a cash-out refinance. Ask yourself when deciding: Do you value paying off your loan sooner, or do you value a lower monthly payment each month? Each option carries different risks and rewards, so align your strategy with your broader financial goals.

6. Shop around for lenders

Mortgage rates and closing fees can vary significantly between lenders, often changing hour by hour. While it’s tempting to stick with your current bank or go with your realtor’s recommendation, getting quotes from at least a few different sources is the only way to ensure you’re getting the best rate.

Research shows taking the first mortgage offer could cost you thousands over the life of the loan. “A lot of people are only going to one lender,” Ng says. “Consult with at least two or three.”

In fact, it’s not uncommon to find a full percentage point difference between a lender’s direct quote and the competitive offers available through Bankrate’s marketplace. By casting a wider net, you increase your odds of finding a lender whose pricing best suits your budget.

• Methodology

  Bankrate analyzed data from ICE Mortgage Technology to estimate how many homeowners who are current on their mortgages could benefit from refinancing based on current market conditions.

  To estimate potential refinance savings over five years, Bankrate used the Mortgage Bankers Association’s latest reported average refinance loan size. Monthly and annual refinance savings were calculated by comparing principal-and-interest payments on a 30-year fixed mortgage at 7.09% and 6.34%. The estimate assumes a 20% down payment and does not include home insurance, property taxes or other additional housing costs.

  Data from ICE Mortgage Technology does not account for individual factors such as credit score, income, home equity or lender requirements, all of which can affect whether a homeowner qualifies to refinance.