Refinance Demand Plummets 70% -- But Here's One Good Reason to Refinance Today

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KEY POINTS

  • Mortgage rates have been climbing rapidly since the start of 2022.
  • It's not shocking that fewer homeowners are rushing to refinance their mortgages.
  • If you're looking to tap your home's equity, a refinance might still make sense.


It's not surprising -- but it may also be that homeowners are overlooking one key opportunity.

There's a reason homeowners rushed to refinance their mortgages from mid-2020 through much of 2021. In the wake of the pandemic, mortgage rates plunged to record low levels, making refinancing an attractive option. And many homeowners were able to shrink their monthly mortgage payments by taking advantage of ultra-low rates.

But this year, refinancing holds a lot less appeal. The reason? Mortgage rates have risen sharply since the start of 2022. Part of that was inevitable -- rates sat at such low levels for a year and a half that they were bound to start climbing at some point.

Mortgage rates are also up this year as a result of plans on the part of the Federal Reserve to hike up its federal funds rate. To be clear, the Fed doesn't actually set mortgage rates, or any consumer borrowing rates. But when it raises the federal funds rate, which is the rate banks charge one another for short-term borrowing purposes, consumer interest rates tend to follow a similar pattern.

Because mortgage rates have gotten so expensive, there's been a huge dip in refinancing demand. In fact, mortgage refinances are now down 70% compared to a year ago. But while refinancing may not make sense for borrowers looking to shrink their monthly housing payments, there's one situation where refinancing could still be a smart move.

When you want to tap your equity

If you own a home, you may be sitting on more equity than you've ever had. That's because property values are up on a national scale, and while they could start to dip as 2022 moves along, so far, they're holding steady at inflated levels.

That's a bad thing for potential home buyers. But if you own a home, it means you have a prime opportunity to tap into your home's equity, which is the portion of your home you own outright. If your home value is $500,000 and your mortgage balance is $300,000, you're left with $200,000 worth of equity.

Now there are different ways you can access your home equity, such as borrowing against your home via a home equity loan or line of credit (HELOC). But another way to tap that equity is to do a cash-out refinance.

With a traditional mortgage refinance, you swap your existing home loan for a new one with the same balance. With a cash-out refinance, you borrow more than your existing mortgage balance, and you're able to use that extra cash for whatever purpose you want.

So going back to our example, if you have a $300,000 mortgage at a rate of 5%, you probably won't save much, or any, money by refinancing based on today's rates. But what you might be able to do is refinance to a $400,000 loan and borrow that extra $100,000 at a lower rate than what you'll find elsewhere.

Should you refinance your mortgage?

Even if you're not interested in doing a cash-out refinance, you might still have an opportunity to enjoy savings with a traditional refinance. If your credit score wasn't great at the time of your initial mortgage application, it may be that you can qualify for a lower mortgage rate now, even though borrowing costs are higher than they've been in a while.

But either way, whether you decide to do a regular refinance or a cash-out refinance, make sure to shop around with different lenders before signing an offer. Doing your research could help you eke out savings you'll really appreciate at a time when borrowing rates are up.

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