Refinance Applications Plummet as 30-Year Rates Top 4%

Rising rates make a weaker case for refinancing.

When mortgage rates fell to record lows in mid-2020, many homeowners rushed to refinance. And refinance demand stayed strong in 2021 as well. But for the week ending Feb. 11, refinance volume plunged 53% from the same week a year earlier. We can blame rising mortgage rates for that.

Although mortgage rates are still fairly competitive from a historical standpoint, they're at higher levels than borrowers have seen in a long time. It's easy to see why refinancing holds much less appeal these days.

If you haven't refinanced your mortgage since rates started falling in mid-2020, you may wonder if you've missed that boat. And the answer? It depends.

It's all about the numbers

If your goal in refinancing is to lower your monthly mortgage payments, crunch some numbers to see if it's possible at today's rates. Let's imagine that, based on your current mortgage rate and today's refinance rates, you're looking at interest rate savings of 0.5%, resulting in a monthly mortgage that's $125 less than what you're paying.

That's a nice amount of savings, so it could pay to refinance -- provided the closing costs your lender charges are reasonable. Just as closing costs come into play with a purchase mortgage, you have to pay closing costs to finalize a refinance. And if those fees are excessive, it could make refinancing a poor choice.

Going back to our example, imagine it will cost you $6,000 to refinance your mortgage. If that saves you $125 a month, it will take you 48 months to break even. That's a pretty long time. But if you're convinced you've found your forever home and plan to stay for a decade or longer, refinancing could be worth your while.

On the other hand, if refinancing only saves you $50 a month, then it may not be worth the closing costs. In that case, you're looking at a break-even period of 10 years with $6,000 in closing costs. And a lot can happen in 10 years. You might get a new job and relocate, or you might downsize if your kids move out. And if you refinance, you might risk never breaking even.

What's the right call?

If you already have a low interest rate on your mortgage and won't save very much by refinancing at today's rates, there's little point in moving forward. The exception, however, may be if you're looking to take cash out of your home.

With a cash-out refinance, you borrow more than your remaining mortgage balance, and you can use the extra money for any purpose. If your mortgage balance is $200,000, but your home is worth $400,000, it may not be a bad idea to do a $250,000 cash-out refinance for a $50,000 renovation. Even with refinance rates up, they're lower than what you're likely to pay on a home equity or personal loan.

Another thing to keep in mind: While mortgage rates are substantially higher than they were last year, we don't know if they'll creep back down. So while it may not make sense to refinance this month, things could change as 2022 plugs along.