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The average 30-year mortgage rate in the United States has fallen from a peak of 7.9% in late 2023 to the current level of around 6% as of late September. Many people who bought homes in the past couple of years could potentially benefit from refinancing their mortgage.

However, just because rates went down doesn’t necessarily mean it’s time for you to refinance right now. Before you decide to refinance your mortgage in 2024, here are three things you need to do.

1. Do the math

The first step is to determine whether refinancing is right for you. This is actually two “things to do” in one.

First, you need to know how to determine your cost savings from refinancing. You can do this with a mortgage calculator. For example, if you have a 7% interest rate and owe $300,000, getting a 6% interest rate could save you about $150 per month.

Second, you need to understand how the fees related to mortgage refinancing work. Some of these fees are quite standard among lenders, such as recording fees and local taxes. But others — particularly the origination fee — can vary widely. In any event, remember that refinancing isn’t free, and has closing costs just like when you get a purchase mortgage.

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By comparing the expected cost savings with the costs of refinancing, you can determine whether refinancing is a good idea. For example, if you expect to save $100 per month by refinancing and it will cost you $3,000 to do it, you’ll break even after 30 months of paying the new loan. If you’re going to be in the home for significantly longer than that, refinancing could be a smart idea.

2. Work on your credit

If you have a FICO® Score in the top credit tiers (typically anything over 760 for mortgage purposes), you can skip this section. But if not, you might be surprised at how much of a difference your credit score can make in your interest rate.

It isn’t uncommon for borrowers with fair credit to get interest rates that are more than a full percentage point greater than the rates offered to excellent-credit borrowers. Even a small increase in your FICO® Score can make a difference.

It could be a smart idea to take some time to work on your credit before refinancing. Maybe take a few months and aggressively pay off credit card debt. But the point is that a better credit score can potentially save you thousands of dollars in interest.

3. Shop around

As a final item on your to-do list, it’s incredibly important to shop around for a lender when refinancing. I don’t just mean reading reviews of several refinancing lenders and deciding which one sounds like the best fit (although reading reviews is a good starting point). I mean actually applying for personalized rates with at least three or four mortgage lenders.

You might be surprised at the different rates and fees. Even an eighth of a percentage point difference in refinancing rates can save the typical home buyer several thousand dollars in interest.

Refinance the right way

The bottom line is that refinancing can be a great idea if mortgage rates are significantly lower than they were when you bought your home. But ensure the numbers work and you’re putting yourself in a position to get the best possible interest rate.

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