Waiting for Interest Rates to Drop to Refinance Your Mortgage? 2 Reasons to Refinance ASAP

Today's mortgage rates are by no means the highest in history. But they're considerably higher than the record-low rates we saw in 2020 and 2021.

The average rate on a 30-year mortgage is 6.71% as of this writing, according to data from Freddie Mac. Considering that three years ago, you could sign the same mortgage at or under 3%, 6.71% seems unappealing. As such, it's generally not considered a great time to refinance a mortgage. 

But there are some exceptions to this general rule. And if these things apply to you, you may actually want to refinance as soon as possible.

1. You want to maximize home equity during a cash-out refinance

Many people who refinance a mortgage borrow the exact amount of money they owe on their current loans. But that's not your only option. 

Say you owe $150,000 on your mortgage but your house is worth $300,000, and you need $40,000 for a home improvement project. You could, in that case, tap your $150,000 worth of equity via a cash-out refinance.

A cash-out refinance lets you borrow more than your remaining mortgage balance. You can use the excess funds however you want. 

So in this example, you'd refinance a $150,000 mortgage into a new $190,000 loan. The first $150,000 would pay off your old home loan, and the $40,000 would be yours to spend as you wish.

If you have reason to believe your home's value is elevated now and might drop in the future (perhaps once the real estate market cools off further), then it could pay to move on a cash-out refinance. The higher the value of your home, the more equity you get to tap.

2. You have a high interest rate on your mortgage and can actually save based on today's rates

If you signed your initial mortgage in 2020 or 2021, then chances are, you snagged a competitive interest rate on it. But let's say you signed your mortgage years earlier, and that your credit score wasn't all that great at the time. It may be that you're paying a higher interest rate than what you'd qualify for today, even with current rates being up.

Now, one thing you should know is that when you refinance a mortgage, you pay closing costs, the same way those expenses apply to finalize a regular mortgage. As such, you'll generally want to make sure you can shave about 1% or more off of your current loan's rate for a refinance to make sense.

But let's say you're paying 7.85% on a mortgage and qualify for a refinance at 6.8%. In that scenario, refinancing could pay off. On the other hand, it probably doesn't make sense to refinance if your current interest rate is 7% and you're looking at 6.8% instead. 

All told, it doesn't make sense for the typical homeowner today to refinance. But under these specific circumstances, a new home loan might be smart for you.