You don’t have to refinance your mortgage to cut your interest

 If you purchased a home within the last few years, you might have felt a jolt of jubilation watching mortgage rates fall.

If you locked in at the recent peak — nearly 8 percent last year — you may wonder whether now is the time to refinance.

The refinancing fever was sparked by the Federal Reserve’s half-point reduction in interest rates in September. Although mortgage rates aren’t directly tied to Fed rate changes, the policy action still affects the housing market.

As of Oct. 3, the average 30-year fixed-rate loan was 6.12 percent, compared with 7.49 percent a year ago, according to Freddie Mac.

“Given the downward trajectory of rates, refinance activity continues to pick up, creating opportunities for many homeowners to trim their monthly mortgage payment,” said Sam Khater, Freddie Mac’s chief economist.

Over time, lowering your mortgage rate can lead to significant savings. But what if you can’t refinance because you don’t qualify or your home is worth less than what you owe, meaning you are underwater?

Or maybe you are 15 or 20 years into a 30-year mortgage and don’t want to stretch the payments out again. You might also want to wait to see if rates fall even further.

Here are the two most common ways to lower your effective interest payments.

Prepay your mortgage principal

There is a straightforward way to reduce what you’ll pay in mortgage interest without refinancing: Work down the principal.

HSH.com, which publishes mortgage and consumer loan information, has two calculators for homeowners who cannot or choose not to refinance: “PreFi” and “LowerRate” help consumers determine how to attain a lower effective interest rate by prepaying their mortgage principal.

The PreFi calculator is most helpful if you have a specific dollar amount available for monthly prepayment. It calculates your interest savings over the remaining loan term and your effective interest rate as a result of making extra payments.

The LowerRate calculator can be used to aim for a specific interest rate.

Using the PreFi calculator, let’s say you took out a 30-year, fixed-rate mortgage for $400,000 at 8 percent on Oct. 19, 2023 (your initial payment date). Starting in November, you plan to apply $200 to the principal every month.

Without prepayment, you will pay off your loan in 348 months (29 years). According to the HSH PreFi calculator, you have $622,102.82 in scheduled interest yet to be paid. With prepayment, you will pay it off in 279 months (23.25 years), saving $145,261.83. But that extra $200 a month would also reduce your effective interest rate to 6.42 percent.

Without prepayment, you will pay off your loan in 348 months (29 years). According to the HSH PreFi calculator, you have $622,102.82 in scheduled interest yet to be paid. With prepayment, you will pay it off in 279 months (23.25 years), saving $145,261.83. But that extra $200 a month would also reduce your effective interest rate to 6.42 percent.

As you shop for a loan — and you most definitely should — here are some tips to help you make the best decision.

Look at what other borrowers are being offered: Each Thursday, Freddie Mac releases a mortgage market survey showing the average rates for 30- and 15-year fixed loans. As of Oct. 3, a 15-year fixed rate was 5.25 percent, down from 6.78 percent a year ago.

Comparison shop: Average interest rate figures give you a general idea of what others are being offered. But what matters is what rate you can get.

Of course, check with your current lender, but don’t just stop there. One site to consult is bankrate.com. On the homepage, click the link for “Home refinance.” Keep in mind that what you are eventually offered will depend on your personal situation, which includes your credit history.

Do the math: This may seem obvious, but I know what folks do in practice. Homeowners refinance without truly understanding all aspects of their loan.

People brag that they refinanced and didn’t have to pay “anything.”

You may not have to put up money at the closing, but your loan costs something. Lenders get paid. The average closing costs can range from 2 percent to 5 percent of the loan amount, according to Freddie Mac.

“Instead of getting the full benefit of lower rates, you might get something less than what you have but not the lowest interest rate available,” Ilyce R. Glink, author of “100 Questions Every First-Time Home Buyer Should Ask,” points out.

That “no-cost” loan also might involve rolling the cost of the refinancing into the loan, which could also mean paying more interest over the life of the loan.

While on bankrate.com, plug loan-estimation information into the site’s mortgage refinance calculator. Try a few scenarios — zero points, points, rolling the cost into the loan — to compare your refinance costs long-term and the break-even point.

Whatever you decide, know the numbers, for real.