Refinance Demand Falls 20% Year Over Year Thanks to Rising Rates

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Climbing refinance rates may be keeping homeowners from getting new mortgages. But should you refinance?

There was a point last year when mortgage refinance lenders were being inundated with refinance requests. But much of that excitement has waned, and rising refinance rates could be to blame.

The Mortgage Bankers Association reports that applications to refinance a mortgage fell 5% last week and were 20% lower than they were a year prior. Given that refinance rates -- which are generally a bit higher than purchase mortgage rates -- have been climbing since February, that pullback isn't all too surprising.

It does, however, beg the question: Should higher rates stop you from refinancing? Or does it still pay to swap your existing home loan for a new one with different terms?

The case for refinancing today

While it's true that today's refinance rates are higher than they were back in January, there's still savings to be reaped by getting a new home loan. In fact, today's rates are still very competitive on a historical basis. So if you refinance, you could lower your mortgage's interest rate quite a bit -- and slash your monthly payments along the way.

But even if you don't manage to snag a much better interest rate on your home loan, refinancing could still make sense for you. Say you're in the process of paying off a 15-year mortgage and you're having a hard time keeping up with those payments. If you were to refinance to a 30-year loan, your payments would go down and you'd get a bit of breathing room.

Similarly, say you have an adjustable-rate mortgage and you're getting close to the point where your interest rate could start climbing. If you don't want to take the risk of that happening, then refinancing to a fixed-rate loan could pay off.

Finally, you may want to refinance if you have a lot of equity in your home and want to take cash out of it. (Equity is the difference between what your home is worth and what you owe on your mortgage. It's basically the portion of your home's value that you truly own.) With a cash-out refinance, you borrow more than your existing mortgage balance. You can then use the excess cash for any purpose.

Let's say you owe $150,000 on your mortgage, but you also have $20,000 in credit card debt with an interest rate of 20%. If you can do a $170,000 cash-out refinance at 3.5% interest, you can use that extra $20,000 to pay off your credit cards at a much lower rate. (The first $150,000 will pay off your existing mortgage balance.)

Of course, there are closing costs associated with refinancing a mortgage, so you'll need to make sure you plan to stay in your home long enough for those to be worthwhile. For example, if you're charged $5,000 in fees to refinance and your new mortgage saves you $250 a month, you won't come out ahead financially right away. Rather, it will take you 20 months to break even from that expense. So if you think you might move within 18 months, refinancing won't make sense.

The point is that you shouldn't let today's slightly higher refinance rates stop you from getting a new mortgage, because dumping your existing loan for a new one could still very much work to your benefit.

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