Refinancing in 2022 May Be a Poor Choice for This Reason

It may not be the best time to get a new home loan.

Refinancing a mortgage has its benefits. For one thing, it could result in lower monthly payments. It could also give you a chance to take cash out of your home if you have enough home equity in it.

Over the past year and a half, homeowners rushed to refinance their mortgages to take advantage of record-low rates. But rates are starting off higher in 2022, and there's a good chance they'll continue to climb. And so 2022 may end up being a bad time to swap an existing mortgage for a new one.

Interest rates are up and could climb even more in 2022

To be clear, refinancing won't always result in a lower interest rate on your mortgage. Say you're currently paying off a 15-year loan and are struggling to make your payments, whether because your income dropped or your non-mortgage expenses rose. If that's the case, it could make sense to refinance from a 15-year mortgage to a 30-year loan. Doing so might easily result in a higher interest rate, but lower monthly payments that are more affordable for you.

But if your goal is to keep the same loan term but snag a lower interest rate on your mortgage, then 2022 may not be the optimal time to do it. As of this writing, the average refinance rate on a 30-year mortgage is already upward of 4%. If rates continue to climb, we could see the average 30-year refinance rate inch closer to 4.5% this year.

Historically speaking, these aren't terrible rates. But they're also not nearly as competitive as the interest rates we saw on refinances from mid-2020 through the end of 2021.

Should you refinance in 2022?

You may have a specific reason for refinancing, such as to extend the length of your repayment period to lower your monthly payments or take cash out of your home via a cash-out refinance. For the latter, even with refinance rates being up, you might still score a much lower interest rate with a cash-out refinance than you would with a home equity or personal loan.

But if your goal is to snag a lower interest rate on your loan and lower your monthly payments, you'll need to crunch the numbers and see if refinancing makes sense given today's rates. If you already have a pretty low interest rate on your mortgage, and you want to keep the same loan term, then you may not reap any or much savings based on today's rates.

Remember, when you refinance, you're charged closing costs to finalize your new loan, and those can be expensive. You need to make sure you're in line for enough savings to make those fees worth paying.

If you're only shaving, say, a quarter of a percentage point off of your mortgage's interest rate, then that might result in savings of $50 a month. If you're charged $5,000 in closing costs, it will take 100 months for you to break even based on a monthly savings of $50. That's probably not worth it.

Ultimately, though, it pays to run the numbers if you're interested in refinancing before writing it off. Based on your goals and current mortgage, it's an option that could still make sense for you.