Will Refinancing Your Mortgage Make Sense in 2024?

In 2020 and 2021, mortgage lenders started offering record-low interest rates to entice borrowers during a major economic crisis fueled by the pandemic. But mortgage rates have climbed steadily since 2022, and this year, they reached levels not seen in many years.

Because of this, 2023 has generally not been a great year to refinance a mortgage. But will things be different in 2024?

Borrowing rates may not drop all that much

As of Dec. 7, 2023, the average 30-year mortgage rate was 7.03%, according to Freddie Mac. We don't know exactly what mortgage rates will look like at the start of 2024, or what they'll look like as the year progresses.

But there's a good chance that mortgage rates will come down during 2024, especially if inflation continues to cool and the Federal Reserve cuts interest rates. But whether mortgage rates fall to a level that makes them competitive again is questionable.

It's pretty fair to say that if you're a typical borrower who signed a mortgage in the five-year period prior to the fall of 2022, then a refinance in 2024 likely won't result in a lower interest rate. But snagging a lower interest rate isn't the only reason to swap an existing mortgage for a new one.

Refinancing might help you pay off costly debt

If your goal in refinancing is to save money on your mortgage payments, then you'll ideally want to lock in a rate that's about 1% lower than your current rate. So let's say you signed your mortgage at 5% in mid-2022, right before rates really started to climb. For a mortgage refinance to make sense in 2024 from an interest rate perspective, you'd ideally want to target a rate of about 4%. That's unlikely to happen given where rates are today. 

The reason for wanting that 1% rate reduction is that you're charged closing costs to refinance a mortgage. So you want to make sure your monthly savings are high enough to allow you to recoup those costs in a reasonable amount of time. 

But even if you can't lower your mortgage's interest rate with a refinance in 2024, it could still pay to get a new home loan if you're carrying high-interest debt. If you do a cash-out refinance, you can tap the equity in your home to borrow more than your remaining mortgage balance. You can then use the extra cash to pay off high-interest debt. 

As an example, let's say you owe $150,000 on your mortgage and your home is worth $250,000. Let's say you also owe $50,000 on your credit cards, and you're paying an average interest rate of 20% on that debt. 

You might be paying 6% on your mortgage now, and you may only qualify for the exact same rate on a new loan in 2024. But if you can take another $50,000 out of your home at 6% (in other words, do a cash-out refinance for $200,000), you're effectively replacing the 20% interest rate from your credit cards with a 6% rate, thereby saving yourself money.

All told, refinancing won't make sense for many borrowers in 2024. But pay attention to how rates trend in case they end up dropping at a faster pace than expected. Also consider refinancing if you have a lot of high-interest debt to pay off and a lot of equity in your home you can tap.