Homeowners Just Rushed to Refinance as Borrowing Rates Dipped. Should You Do the Same?

If you've been wanting to refinance, the time to act may be now.

Refinance demand has generally been down over the past year as mortgage rates have soared. But last week, mortgage rates dipped downward to a modest degree. And that prompted more homeowners to refinance their mortgages -- so much so that there was a 5% increase in refinance applications compared to the previous week.

Now to be clear, mortgage rates are still very high compared to where they sat a year ago. And refinance volume is still 86% lower than it was a year ago, due to higher borrowing rates.

But if you've been thinking of refinancing your mortgage, the time to act may be now. Wait too long, and it may not be as cost-effective.

Can you benefit from refinancing?

Because mortgage rates are so high these days, it doesn't make financial sense for a lot of homeowners to refinance. In fact, data firm Black Knight found that a year ago, a good 7 million homeowners could have benefited financially from a mortgage refinance. At this point, that number is whittled down to just 270,000.

But if you happen to fall into the category of homeowners who can still benefit from a refinance, then you may want to move quickly, before borrowing rates rise again. And to be clear, that's a distinct possibility.

The Federal Reserve isn't done raising interest rates to battle inflation. And while the Fed doesn't set mortgage rates directly, its rate hikes tend to drive up the cost of mortgage borrowing, as well as other types of consumer borrowing.

Meanwhile, many economists are eagerly awaiting details from December's Consumer Price Index (CPI) report. The CPI is a key measure of inflation, and it speaks to rises and drops in the cost of consumer goods.

If the CPI shows a nice cooling of inflation in December compared to November, the Fed might go easy on its next rate hike. But if the Fed doesn't like what it sees, we could be in store for another aggressive rate hike -- which is all the more reason to lock in a rate on a mortgage refinance sooner rather than later.

Is refinancing the right way to go?

In some cases, refinancing can make sense for people with a lot of equity who want to take cash out of their homes and use it for things like renovations and repairs. But if you're talking about a regular refinance, not a cash-out refinance, then you'll need to get some quotes from lenders and see how much savings you stand to reap.

If you currently have a high interest rate on your mortgage loan, a refinance could lower your monthly payments. But you'll generally want to be able to shave at least 1% off of your mortgage for a refinance to make sense.

When you refinance, you bear the expense of closing costs that often amount to 2% to 5% of your loan amount. So if you're going to pay those closing costs, you should aim to get a decent amount of mortgage savings out of the deal.