Refinance Rate Hike Spooks Homeowners -- Is It Still Worth It to Refinance?

by Maurie Backman | Updated July 19, 2021 - First published on April 2, 2021

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"Rates" on a stick note on a house

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Refinance rates have climbed, but there could still be potential savings to enjoy.

Refinancing is a great way to lower your monthly mortgage payments -- but only if rates are attractive enough to produce big savings. And while refinance rates sat at or near historic lows for much of late 2020 into early 2021, over the past two months, they've climbed steadily.

Those rate hikes have certainly turned homeowners off. Applications to refinance a home loan decreased 3% last week, according to the Mortgage Bankers Association, and were 32% lower than they were a year ago.

But just because many homeowners are holding off on refinancing doesn't mean it's the wrong move for you. Here are some reasons you may want to refinance despite a recent uptick in rates.

1. You can still save money on a monthly basis

Today's refinance rates aren't as low as they were back in January. But if you can snag a rate that's around 1% lower (or more) compared to what you're currently paying, then refinancing could make sense.

Say you have a 30-year, $100,000 mortgage with an interest rate of 4.4%. That means you're looking at monthly payments of $501 for principal and interest on that loan. Meanwhile, today's average 30-year refinance rate is 3.4%. If a mortgage lender offers you that rate to refinance, you'll lower your monthly principal and interest payment to $443.

It's worth noting you'll also be charged closing costs to refinance, so you'll need to make sure you have enough savings to break even from those fees. But let's say you're charged $4,000 to refinance, and you know you won't be moving for a decade or more. It'll take you about six years to break even from your closing costs. ($4,000 divided by $58 in monthly savings equals 69 months.) But if you plan to remain in your home for the long haul, then refinancing could pay off.

2. You can alter the length of your repayment period

Maybe you're repaying a 15-year mortgage but the monthly payments are a strain on your budget. If you refinance to a 30-year loan, you'll lower those payments by extending your repayment period. While you'll generally pay a higher interest rate on a 30-year mortgage than a 15-year loan, it may be worth going this route because today's refinance rates are still fairly competitive.

3. You can take cash out of your home

Home values have soared in the course of the pandemic. If your home is worth a lot more than it was a year ago, and you need to borrow money, it could pay to do a cash-out refinance. This type of refinance lets you borrow more than your remaining mortgage balance and use the extra cash for any purpose. For example, if you owe $100,000 on your home loan, you may be eligible to do a cash-out refinance for $120,000. You'd use the first $100,000 to pay off your existing lender and then get a check for the remaining $20,000.

Now to be clear, that extra $20,000 is still money you'll need to pay off. But you may be eligible to do it at a fairly competitive interest rate, especially compared to what you might pay for a home equity loan or a personal loan.

Refinance rates may no longer be hovering around historic lows, but that doesn't mean there aren't savings to be reaped. Think about the ways you might benefit from refinancing before assuming you shouldn't bother getting a new home loan today.

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