Rising Rates Drive Uptick in Refinances

Homeowners have been rushing to refinance their mortgages. Should you?

During the summer of 2020, when mortgage rates hit record lows, many homeowners rushed to refinance their mortgages. Things slowed down at several points this year, even as rates remained competitive.

This past week, something interesting happened: Mortgage rates -- along with refinance rates -- climbed. But so did refinance applications, to the tune of 3%, according to the Mortgage Bankers Association.

Mortgage rates ticked upward following an announcement by the Federal Reserve that interest rate hikes would come in 2023, which is sooner than expected. While the Federal Reserve doesn't establish mortgage rates, it can influence them.

Of course, it may seem counterintuitive that refinance levels increased just as getting a new home loan grew more expensive. But it could be that borrowers wanted to get in on the refinance action before rates rise even more. Plus, historically speaking, today's refinance rates are still very competitive, so it's actually pretty easy to see why getting a new home loan might appeal to homeowners despite a recent uptick.

Should you refinance your mortgage?

Refinancing could lower your monthly mortgage payments and save you a bunch of money on interest over the life of your loan. But refinancing isn't a good bet for everyone. If you're not sure whether you should refinance, ask yourself these questions.

1. Do I have a good credit score?

To save money by refinancing, you'll need to lower your mortgage's interest rate. And to qualify for a great rate, you'll need great credit. That generally means having a credit score in the mid-700s or higher. You might qualify to refinance with a lower credit score, but you may get stuck with a higher interest rate.

2. Am I planning to stay in my home for several more years?

When you refinance a mortgage, you're charged closing costs, which are a collection of fees you'll pay to finalize your loan. Each mortgage lender sets its own closing costs, and generally, those fees amount to 2% to 5% of the loan amount you take out. Make sure that you'll stay in your home long enough to recoup your closing costs and come out ahead financially.

If you refinance a $300,000 mortgage, for example, and are charged closing costs that equal 4% of that sum, you'll pay $12,000. If doing so lowers your monthly mortgage payments by $300, it'll take you 40 months to break even. That's fine if you're planning to live in your home for, say, another five years. But if you think you might move within a couple of years, then refinancing won't make sense.

3. Do I want to borrow against my home?

Before you take out a home equity loan or line of credit (HELOC), you may want to look into a cash-out refinance. That's where you borrow more than your remaining mortgage balance and get a cash payout that you can use for any purpose.

Doing a cash-out refinance will leave you with a higher home loan balance. As such, your monthly payments could go up, even if you manage to snag a lower interest rate on your mortgage than what you currently have. But the interest rate you pay on a cash-out refinance will likely be much lower than what you'd be charged for a home equity loan or HELOC.

Refinancing your mortgage could be a smart move, even if rates are a bit higher these days than they were a few weeks ago. Just make sure it's the right choice for you.