Refinances Are Way Down. Should You Do One Anyway?

Refinancing a mortgage could still make sense, but only in limited circumstances.

In the summer of 2020, when mortgage rates plunged to record lows, homeowners rushed to refinance, to the point where mortgage lenders found themselves pretty overwhelmed. But we're in a very different situation today.

Mortgage refinances are down 87% compared to where demand sat a year ago, according to the Mortgage Bankers Association. And while some homeowners jumped on the chance to refinance in December of 2022, when mortgage rates dipped slightly, rates have since come back up. That means that once again, many homeowners won't actually reap savings in the course of refinancing a mortgage.

But while it's generally not a great time to refinance a mortgage, in limited circumstances, it could make sense. Here are two scenarios where you may want to consider refinancing after all.

1. When you can still come away with savings

It may be that when you signed your original mortgage, your credit score wasn't in good shape and you barely qualified for that loan in the first place. If your credit score is now stellar, then you might be able to snag a lower interest rate on a home loan than what you're paying already. So if that's the case, a refinance could make financial sense.

That said, there are closing costs associated with refinancing, so you'll need to make sure you're reaping enough savings for those fees to be worth paying. As a general rule, you should aim to come away with an interest rate on a new mortgage that's about 1% lower than your current rate at the very least. If your current mortgage rate is 7.25% and you're approved to refinance at 6.85%, that's probably not worth doing.

2. When you want to tap your home equity

Many people who refinance borrow the same amount they owe on their existing mortgages. But there's another option you can look at -- a cash-out refinance.

With a cash-out refinance, you borrow more than your remaining mortgage balance, and you get a check for the difference you can use as you please. So as an example, say you owe $200,000 on your mortgage but your home is worth $500,000 and you need $40,000 to finish your basement. That means you have plenty of equity to play around with. You could do a cash-out refinance for $240,000, use the first $200,000 to pay off your existing mortgage, and take the $40,000 for renovation purposes.

The upside of a cash-out refinance is that even though mortgage rates are up right now, it could be a cheaper way to borrow than a personal loan or even a home equity loan. And also, your loan should be easy to manage, because you'll be making only one monthly payment (as opposed to, for example, making a mortgage payment every month and also a separate personal loan payment).

It's fair to say that most homeowners today won't benefit from refinancing. But that doesn't mean there aren't exceptions. So ultimately, your best bet is to consider your personal circumstances and run the numbers before writing off the idea of refinancing.