Will It Ever Make Sense to Refinance a Mortgage Now That Rates Are So High?

In 2020 and 2021, mortgage lenders found themselves overwhelmed with refinance requests. But that hasn't been the case this year. 

It's gotten very expensive to sign a mortgage. As of this writing, the average interest rate for a 30-year fixed loan is 7.57%, according to Freddie Mac. 

Homeowners tend to be motivated to refinance so they can lower their monthly payments. And today's mortgage rates just aren't conducive to that.

But while refinancing your mortgage may not lower your rate or monthly payments, you might still benefit from doing so today. And if not, you might benefit from refinancing in the future.

When you have debt that's costly that you want to consolidate

If you're paying 3% on your mortgage now and your goal is to shrink your monthly payments, then you clearly won't achieve that goal with a refinance. But there's one situation where it could make sense to refinance despite today's higher rates, and it's if you have even more expensive debt that you're trying to consolidate.

Refinance rates tend to come in slightly higher than purchase mortgage rates. So if you're looking at an average rate of 7.57% for a 30-year mortgage, you may be looking at 7.75% for a 30-year refinance. And that's a high rate in the context of mortgages.

But what if you also happen to have outstanding credit card balances where you're paying 19% interest on your debt? And what if you happen to have taken out a personal loan when your credit was poor, resulting in a 14% rate? When you compare these rates to what mortgage lenders are charging, today's mortgage rates don't look so bad. 

And so if you have enough high-interest debt, it could pay to do a cash-out refinance, where you borrow more than your remaining balance on your mortgage. This option may be available to you if you have a nice amount of equity in your home (which is largely the case today for U.S. property owners due to elevated home values). 

Let's say you owe $100,000 on your mortgage with a 3% interest rate, but have another $100,000 in high-interest debt that's costing you well more in interest than today's mortgage rates. If you're able to do a $200,000 cash-out refinance, you might end up with a lower interest rate on all of your debt all in, despite seeing the interest rate on your mortgage balance rise.

Mortgage rates should come down in time

While refinancing a mortgage today probably will not result in savings on your home loan payments, it could still be an option worth considering to tackle high-interest debt. Also, remember that in time, mortgage rates are likely to come down. Once that happens, you may have an opportunity to refinance your mortgage to a lower rate.

Granted, if you signed your home loan in 2020 or 2021, you should know that rates may not end up being lower than what was available back then in your lifetime. So if you have a 3% mortgage rate locked in, consider yourself lucky. 

But it may be that you signed a mortgage last year at 5% or 6%. Refinancing today generally won't save you money. But refinancing in a few years from now might.