Interest Rates Are Rising Again. Did You Miss the Opportunity to Refinance?

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  • The Federal Reserve just raised rates, which could make mortgages even more expensive.
  • This does not necessarily mean it is too late to refinance.

Don't assume you know the answer to this question.

Mortgage interest rates hit record lows during the heart of the COVID-19 pandemic. This led to a refinancing frenzy as millions of Americans sought to get cheaper loans to help make paying for their homes easier. 

Things have changed dramatically this year, though. Refinance rates are up considerably, and the Federal Reserve recently raised interest rates further. While the Federal Reserve's overnight rate doesn't directly impact mortgage costs, the fact it is now more expensive for banks to borrow overnight from each other will likely have an impact on what they charge for home loans.

Since mortgage refinance rates are generally a little bit higher than the rates on new loans, homeowners who were hoping to change the terms of their existing debt may find themselves wondering if it is too late to act. The answer is: it depends. 

This is the crucial factor in determining if refinancing makes sense 

When you refinance your mortgage, you apply for a brand new home loan. This new loan will have a different interest rate and, likely, a different payoff time than your current debt. 

The goal of refinancing is usually to reduce your interest rate, although there are also other reasons to act, such as changing from an adjustable-rate loan to a fixed-rate loan. This means that if you cannot get a refinance loan with a rate below what you are currently paying, it's probably not worth moving forward. 

Not only do you want to drop your rate when you refinance, but you also want to ensure the change is fairly substantial. That's because you have to incur closing costs during the refinancing process and these can add up to several thousand dollars. 

Whether you pay the refinance fees upfront or roll them into your loan, you will only want to refinance if the closing costs end up being paid for by the money you save. In other words, if you would save a little bit on your mortgage loan by refinancing but not enough to break even for closing costs, it's not worth doing. 

Because of these upfront fees, it's generally a good rule of thumb not to refinance unless you can lower your interest rate by around 1.50% to 2%. And many people who have obtained mortgages in the recent past do not have loans with rates that are 1.50% to 2% above current refinance rates. In fact, some recent home buyers may have a rate on their current loan that's below what's being offered on refinance loans. 

But if you got your mortgage a long time ago or did so when you had bad credit and thus paid a higher rate at the time based on your personal financial credentials, it may still be worth looking into your refinancing options.

Your own situation determines if there are still opportunities

Ultimately, there is no one-size-fits-all answer about whether you missed your chance to refinance. 

Based on current rates, you missed out on the rock-bottom deals available last year. But if you can reduce the interest costs you're paying or switch to make your mortgage a safer one, then moving forward with refinancing can still make a lot of sense. 

You should carefully consider your unique goals and financial picture -- as well as your belief in the likelihood that rates will one day drop again -- when deciding what's right for you.

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