Mortgage Refinance Demand Plunges 52%. Did Existing Borrowers Miss the Boat?

Higher mortgage rates make refinancing increasingly less viable.

In mid-2020, when mortgage rates plunged to record lows, many homeowners rushed to refinance their mortgages to lower monthly payments. And refinance activity held strong through 2021, as mortgage rates rose above record lows, yet remained quite competitive.

But the start of 2022 has brought higher mortgage rates into the mix. And that's caused a notable pullback on the refinancing front.

For the week ending Feb. 4, mortgage refinance volume plummeted 52% compared to the same time a year ago, according to the Mortgage Bankers Association. To be fair, overall mortgage applications -- including purchase mortgages -- dropped 39.6%. But when we compare an 11.4% decline in purchase mortgage volume to a 52% drop in refinance volume, the difference is stark.

If you've yet to refinance your mortgage, you may wonder if it's too late. And the answer? It may be.

Does refinancing still make sense?

Some mortgage borrowers still have the potential to reap savings by refinancing a home loan. But if you already have a low interest rate on your mortgage, refinancing may not pay off.

As of this writing, the average 30-year refinance rate is around 4%. So if your existing mortgage interest rate is 4.25%, you're not going to enjoy a whole lot of savings by refinancing -- especially when you factor in closing costs.

Just as you pay closing costs when you take out a mortgage to buy a home, so too do those fees apply when you refinance a home loan -- and they can be substantial, as much as 5% of your mortgage amount.

So let's say refinancing today means saving $50 a month on your monthly payments. If you pay $6,000 in closing costs to save that $50 a month, it will take you 120 months, or 10 years, to break even. That just wouldn't make sense.

The one situation where a refinance could pay off

While you may not lower your mortgage interest rate a lot by refinancing today, the one scenario in which it could still make sense is if you're looking to tap your home equity and take cash out of your home.

Borrowers today are sitting on a record level of home equity. So if you have a major renovation to tackle or another big goal to meet, you may want a cash-out refinance, which lets you borrow more than your remaining mortgage amount.

Even with today's refinance rates higher than last year's, a cash-out refinance is still an affordable way to borrow, especially when compared to a personal loan. And it can be more attractive interest-rate wise than a home equity loan.

While many borrowers may have missed the boat on refinancing, that doesn't mean it's too late for you. Ultimately, you need to crunch your own numbers to see if you can benefit by refinancing at today's rates.