Why Refinancing May Still Make Sense Even as Mortgage Rates Rise
KEY POINTS
- Refinancing can be a smart financial move if it reduces borrowing costs.
- If you can get a lower rate or if you have an adjustable-rate mortgage, now might still be a good time to refinance.
Should you consider refinancing despite the fact rates have been on the upswing?
Demand for mortgage refinance loans has plunged in recent months, and there's a simple reason for that. See, demand for refinancing is more affected by changes in interest rates than demand for new mortgages. That's because current homeowners rarely have to refinance -- while most people purchasing a home need a mortgage to do so. And rates have been rising rapidly for refinance loans in 2022, especially compared with record lows during 2021 when the pandemic was raging.
But, despite the fact that refinance rates have been going up, refinancing is still a smart move in some circumstances. Here are a three situations where you may want to think about getting a new home loan, even though you will no longer be able to do so at the rock-bottom rates from last year.
1. If you can still score a lower rate than you're currently paying
Refinancing would still make sense even though rates are up if the rate you'd pay for your new loan is below what you're currently paying.
For many people, it's still possible to drop their rate by refinancing, even if national average rates are well above where they were in 2021. That's because -- while rates have bounced back from recent record lows -- they are still well below historical averages.
If you have an older loan that you haven't refinanced recently, it's worth looking into whether a loan you could qualify for now could cut your financing costs.
2. If your financial situation has improved
You may also be able to score a lower rate if your financial situation has improved since you took out your original loan. For example, if you had a lower credit score or a lot of debt at the time of your loan, you may have had to pay a pretty high rate -- even if you borrowed at a favorable time. So, if your situation has since improved, you might qualify for a lower rate now.
Since many lenders provide refinance quotes at no cost, and without a hard credit inquiry, it may be worth looking into rates -- especially if you borrowed a long time ago or your financial situation has gotten better.
3. If you're worried about your rate adjusting soon
Another situation where refinancing could make sense, despite rising rates, is if you currently have an adjustable-rate mortgage (ARM). ARMs have a rate locked in for a limited time, but eventually they begin moving along with a financial index, which means your rate could go up.
Since most experts believe rates will continue rising for a while, this may be your last chance to switch to a fixed-rate loan and lock in at the current rates before mortgages become even more expensive.
The bottom line is, increasing rates don't mean refinancing should be off the table for everyone. Consider your personal circumstances and see what rates you could qualify for now. Then compare them to what you're currently paying to decide if getting a new home loan is a good financial move for you.
Our Research Expert
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