7 Reasons Why Now Is Not the Time to Refinance a Mortgage

Home refinancing boomed from 2020 to late 2021. Record-low interest rates and rapidly rising home prices created the perfect storm for homeowners to cash out on newfound equity while securing a lower interest rate at the same time.

While the real estate market is still booming, the circumstances for refinancing have changed dramatically since the start of the year. If you're considering refinancing, here are seven reasons now is not the right time to do it.

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In January 2021, mortgage rates were at an all-time low of 2.65%. Today, rates are 5.5% -- over double what they were just one year ago. While there are other reasons people may want or need to refinance, generally, the rule of thumb is that you should only refinance if you can secure an interest rate that's at least 0.75% lower than your current rate.

Home prices have grown 19% over the last year, meaning homebuyers who purchased properties even in the last year are likely sitting on a lot of equity. If you refinance now to cash in on your property's equity while home prices are high, you may get a nice lump sum of money now, but you will be paying a lot more for it in your monthly payment and interest over time.

Given we're in an increasing interest rate environment, most mortgages secured since 2008 have been at lower rates than today. So, refinancing today -- assuming you're pulling out cash from your property through a cash-out refinance -- would result in a higher mortgage payment each month because of the higher rate.

ALSO READ: Should I Refinance My Home?

Loans are amortized over a period of time, usually 15 to 30 years, with the monthly mortgage payment paying a portion of interest and principal in each payment. The beginning of an amortization period is mostly interest.

When you refinance your home, you are entering into a new loan at a new price, term, and rate. Refinancing resets the amortization clock and restarts the high-interest period of repayment on your amortization schedule. In other words, you pay more interest to the bank over time.

Refinancing to save money by taking advantage of a lower rate can eventually lead to a break-even point. That's where the money you save with the lower interest rate, even with the extra closing costs and fees associated with a refinance loan, makes up for the cost of getting the loan at first.

However, in a higher interest rate environment, the break-even point is much harder to achieve -- in most cases, it's impossible.

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Getting a loan or taking out any type of credit negatively impacts your credit score, at least temporarily. If you recently got a mortgage and aren't fully recovered from the impacts, refinancing could hurt your credit score further.

Although it's important to note, mortgages are fantastic for building credit over time -- so long as you pay on time each month. So, this negative impact is only a temporary one.

Home prices are continuing their upward trend for now, but many signs point to the real estate market wavering and possibly heading for a downturn. If you refinance while prices are high, you could find yourself in a position of negative equity, owing more than the home is worth.

This was a huge problem in the Great Recession, and while circumstances are certainly far different today, it is a risk in a changing housing market.

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In today's higher interest rate environment, refinancing likely isn't the best move. But there are two scenarios in which it could make sense. First, securing a mortgage rate that is at least 0.75% lower than your current rate could create savings over the long run.

And second, if you simply need the cash from your home and have enough income to support a higher monthly payment, refinancing may make sense. But make sure you fully understand the long-term financial impact and obligations.

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