Mortgage Refinances Jumped 18% Last Week. Is Now a Good Time to Refinance?

If you've been itching to refinance, now could be a solid opportunity.

When mortgage rates plunged to record lows in 2020, many homeowners rushed to swap their existing mortgage loans for new ones. But not surprisingly, refinance activity slowed down in 2022 on the heels of rising mortgage rates.

This year, however, mortgage rates have been creeping downward. And for the week ending Feb. 3, mortgage refinance volume rose 18% compared to the previous week, according to the Mortgage Bankers Association.

If you've been thinking about refinancing your mortgage, now could be a decent time to do it given a recent drop in borrowing rates. Even though rates have the potential to keep dropping, you might benefit from refinancing sooner rather than later.

It could pay to refinance

We're well past the days of mortgage rates sitting at historic lows. But that doesn't mean you can't reap some savings in the course of a refinance.

Imagine you're able to refinance your 30-year mortgage at 6.2%. If you locked in your original home loan at 7.2%, you could save money on your payments by virtue of that lower interest rate.

But saving money on your monthly payments may not be your sole or even primary motivation for refinancing. Rather, if you have a major home project you've been trying to tackle, a cash-out refinance could allow you to tap your home equity and borrow more than your remaining mortgage balance to fund home improvements.

Let's say you owe $275,000 on your mortgage, but you have enough equity in your home to qualify for a $325,000 cash-out refinance. If you sign that loan, the first $275,000 will go toward satisfying your existing mortgage balance. The remaining $50,000, however, will be yours to spend as you please.

So, let's say you've been desperate to redo your kitchen because it's cramped and you have little storage space. If you've been quoted $50,000 for a complete gut job, then your cash-out refinance could be an affordable way of funding that project.

Of course, in this situation, you could always go out and borrow a different way -- for example, get a personal loan to finance your kitchen renovation. But you might snag a lower interest rate on a cash-out refinance than on a personal loan. And also, that way, you're only paying off one loan at a time, as opposed to having to juggle multiple loan payments.

But what if rates keep dropping?

Any time you lock in a mortgage or a refinance, you run the risk of rates falling even more once your loan is put into place. But since we can't predict what mortgage rates will look like a month or two months from now, you may want to look at refinancing while rates have dropped to a more affordable level.

This especially holds true if you have a major project that will improve your quality of life that you're putting on hold. If your outdated kitchen makes your daily life miserable, and you can afford the payments that come with a cash-out refinance, then waiting is something you may not want to do.