1. What is Rate Reduction?

Rate reduction measures the difference between an old interest rate and a new interest rate, expressed in percentage points. It helps borrowers understand how much they're saving when refinancing or when rates drop.

2. How Does the Calculator Work?

The calculator uses a simple formula:

Where:

• Old Rate — Your current mortgage interest rate (%)
• New Rate — The proposed new interest rate (%)

Explanation: The calculation shows how many percentage points you would save by switching to the new rate.

3. Importance of Rate Reduction Calculation

Details: Knowing your rate reduction helps determine if refinancing makes financial sense, considering closing costs and break-even points.

4. Using the Calculator

Tips: Enter both rates as percentages (e.g., 3.25 not 0.0325). The old rate should be higher than the new rate for a positive reduction.

5. Frequently Asked Questions (FAQ)

Q1: What's considered a good rate reduction?
A: Typically, a reduction of 0.5% or more may make refinancing worthwhile, but depends on closing costs and loan term.

Q2: Does rate reduction equal savings?
A: While it indicates potential savings, actual savings depend on loan amount, term, and how long you keep the loan.

Q3: Should I consider other factors beyond rate reduction?
A: Yes, consider closing costs, break-even period, and how long you plan to stay in the home.

Q4: Can rate reduction be negative?
A: Yes, if the new rate is higher than the old rate, indicating you'd pay more interest.

Q5: How does rate reduction affect monthly payments?
A: Each 1% rate reduction typically lowers monthly payment by about $60 per $100,000 borrowed on a 30-year loan.