Mortgage Refinances Jump as Buyers Rush to Get Low Rates While They Last
Should you refinance ASAP?
- Refinance application volume rose 18% last week compared to the week prior.
- Many borrowers are clamoring for new home loans on the heels of rising mortgage rates.
Mortgage rates have sat at competitive levels, historically speaking, since the middle of 2020. While that still holds true today, 2022 has already seen a notable uptick in rates.
That's driven many existing mortgage borrowers to hop on board the refinance train. Last week, refinance application volume was up 18% compared to the week before, according to the Mortgage Bankers Association. And while refinance volume was still 50% lower than it was a year earlier, it's a sign borrowers are worried that if they don't refinance now, they'll lose the opportunity.
Should you rush to refinance?
The upside of refinancing is being able to lower your monthly mortgage payments by locking in a lower interest rate on your loan. It's also possible to do a cash-out refinance, which allows you to borrow more than your remaining mortgage balance at what could be a very affordable rate.
The higher mortgage rates climb, though, the less appealing refinancing becomes. If you're looking to refinance, you may want to do so sooner rather than later -- before rates rise even more.
That said, refinancing may not be the right move for you. Before you jump into it, ask yourself these questions.
1. How's my credit score?
To qualify for a competitive interest rate on a refinance, you'll need strong credit. If your credit score isn't in the low 700s or higher, the rate you get may not be worth it.
Generally speaking, you should aim to shave about one percentage point or more off of your loan's interest rate with a mortgage refinance. Meanwhile, right now, the average 30-year refinance rate is around 3.85%. But with less-than-stellar credit, you may be looking at a rate of 4.2%. So if your current mortgage rate is 4.75%, refinancing may not be worth it.
2. Do I have plans to sell my home in the near term?
Just as you pay closing costs to finalize a purchase mortgage when buying a home, you also have closing costs with a refinance. Closing costs can equal up to 5% of your loan amount, so you'll need to make sure you intend to stay in your home long enough to at least break even.
Let's imagine you're able to slash your monthly mortgage payment by $200 by refinancing at today's rates. If you're charged $5,000 in closing costs to refinance, it will take you 25 months just to break even. If you think you might move in two years, refinancing won't make sense. But if you're convinced you're in your forever home and can see yourself staying put for a decade or longer, then refinancing could easily pay off based on these numbers.
Decide what's right for you
While there's no guarantee mortgage rates will continue to climb in 2022, many housing experts anticipate an uptick. If you've held off on refinancing thus far, you may want to get moving -- before rates reach the point where it's no longer a viable option.
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