Refinancing Has Gotten Expensive. Here Are 3 Reasons It Could Still Make Sense

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  • It's generally best to refinance a mortgage when borrowing rates are lower than they are today.
  • In some cases, a refinance could still be a smart financial move, even with borrowing rates being higher.
  • If you have a high interest rate on your existing mortgage, you're interested in tapping your home equity, or you need to pay off more expensive debt, refinancing might be worth it.

It could still pay to get a new mortgage and ditch your current one.

During the second half of 2020, mortgage rates started falling to record lows. That drove a lot of homeowners to refinance their mortgages. In doing so, many were able to slash their monthly housing payments and reap a lot of savings in the process.

In 2021, mortgage rates rose a bit, but were still quite competitive. And so refinance demand was pretty strong last year as well.

But this year, mortgage rates have gone nowhere but up. And they've risen at a really rapid clip. 

At the start of 2022, it was possible to sign a 30-year fixed mortgage at around 3%. These days, you're looking at the upper 6% or lower 7% range for the same mortgage product. That's a huge difference, and it explains why so many prospective home buyers are struggling to afford a home right now.

Meanwhile, because mortgage rates are up so much, it's generally not a good time to refinance an existing home loan. And refinance volume has definitely plunged this year. 

But in some cases, refinancing a mortgage could make sense, even with borrowing rates being relatively high. Here are three reasons you might want to move forward with a refinance today.

1. You have a really high interest rate on your existing mortgage 

If you're signing a 30-year mortgage today, you may be looking at a rate of around 7%. But if that's lower than your current mortgage rate, then a refinance could make sense. And if you signed your mortgage at a time when your credit score wasn't so wonderful, then you may have gotten stuck with a higher borrowing rate. If your credit score has since improved tremendously, you might manage to lower the interest rate you're paying on your mortgage by moving forward with a refinance.

2. You want to tap your home equity while it's high

Home values are up right now on a national level, and that means you may have more equity in your home now than you did in the past. If you want to borrow a lump sum to do a major renovation or address much-needed repairs, then it could make sense to refinance now and take cash out of your home via a cash-out refinance. If you wait until home values drop, you may not have enough equity to do that.

3. You want to pay off even costlier debt

A new 30-year mortgage might cost you around 7% right now. But if you're carrying a credit card balance you're nowhere close to paying off, it may be costing you 20% in interest. If you're able to do a cash-out refinance, you can use the money you take out of your home to pay off your credit card balance, thereby slashing the interest rate on your debt and making it less expensive to pay off.

For the most part, now's really not an optimal time to refinance. But in these situations, it could pay to swap your existing mortgage for a new one -- even if the rate you lock in isn't much to write home about.

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