When Will Mortgage Refinances Start to Make Sense Again?

It's not the best time to refinance, but will that change this year?

Although mortgage rates have been lower in 2023 than they were in the fall of 2022, they're still pretty high, historically speaking. And that makes it harder to justify refinancing a mortgage.

Usually, the goal of refinancing a mortgage is to snag a lower interest rate on a home loan, thereby lowering your monthly payments. But when borrowing rates are high, refinancing is usually a no-go.

That might be the case today for many buyers. But will things change in 2023?

Mortgage rates could drop

The Federal Reserve isn't done raising interest rates in an effort to slow the pace of inflation. As such, the cost of borrowing is expected to increase this year again, whether in the form of personal loans, auto loans, or credit card balances.

Mortgage rates, however, won't necessarily follow suit. Mortgage rates, for some reason, tend to exist in their own bubble compared to other consumer borrowing rates.

This isn't to say that general economic conditions won't influence them. But last year, mortgage rates began to rise sharply before the Federal Reserve started to announce aggressive interest rate hikes. And early this year, they dipped compared to late 2022, despite the Fed's continued interest in fighting inflation. As such, there's a good chance mortgage rates will fall over the course of 2023 -- especially if lenders need to drum up business.

Just look at what happened in January. Mortgage rates fell into the low 6% range, which read like a bargain compared to the rates we were seeing in the 7% range in late 2022. Not surprisingly, home sale contract activity picked up in January as buyers rushed to capitalize on a modest break on the borrowing front.

Mortgage lenders might continue to lower their borrowing rates this year, especially if they note a decline in buyer interest. And if rates fall enough, refinancing might start to make sense for a larger number of homeowners.

A reason to refinance now, despite higher rates

If your primary goal in refinancing is to lower your monthly mortgage payments, then now's probably not a great time to move forward. However, if you're looking for a cost-effective way to borrow against your home equity, then a cash-out refinance could make sense.

A cash-out refinance lets you borrow more than your existing home loan balance. You can use the extra money to do anything you want, whether it's renovating your home, starting a business, or taking a vacation (though it's generally best not to take on any sort of extra debt for the express purpose of being able to fund a getaway).

Let's say you owe $200,000 on your mortgage but want to borrow $40,000 for a renovation project. With a cash-out refinance, you could get a $240,000 loan. The first $200,000 would pay off your existing lender, and you'd get the remaining $40,000 to use as needed.

Many U.S. homeowners have a lot of equity in the properties they own because home values are still up on a national level. So if you're specifically interested in a cash-out refinance, now's not a terrible time to pursue one. But if you're simply looking to reap savings on your mortgage payments, then waiting for mortgage rates to come down from where they are today is probably your better choice.