Will It Ever Make Sense to Refinance a Mortgage Again?

There was a time not so long ago when you could sign a 30-year mortgage at or around 3%. But those days are long gone.

Right now, the average 30-year mortgage rate is 7.49%, according to Freddie Mac. And that means that it's a pretty bad time to be refinancing a mortgage. By contrast, in 2020 and 2021, homeowners were clamoring to refinance their loans, so much so that mortgage lenders found themselves overwhelmed with requests.

If you own a home, you may be wondering if there will ever be a good opportunity to refinance a mortgage again. And the answer is, there should be. It's just a matter of when.

Why are mortgage rates so high right now?

There are a few reasons why it's so expensive to sign a mortgage today. For one thing, borrowing costs are up across the board following a string of interest rate hikes on the part of the Federal Reserve.

By raising its benchmark interest rate, the Fed can slow the economy on a short-term basis when inflation needs cooling. But higher short-term interest rates make it more expensive for banks and financial institutions to borrow money themselves, so they tend to pass that cost onto consumers to compensate. That explains why it's more expensive to sign an auto loan, personal loan, or mortgage today.

But another reason why mortgage rates are soaring is that they tend to follow the 10-year Treasury bond. Right now, the 10-year Treasury is at close to a 16-year high. So it's not surprising to see elevated mortgage rates.

Also, the economy is strong right now, and mortgage lenders are aware of that. Buyer demand is also strong. So lenders aren't particularly motivated to lower their rates.

Things could change in time

Today's economic conditions aren't going to last forever. As such, today's mortgage rates are apt to change over time. The big question is, when? And that's not such an easy one to answer.

Ultimately, a sluggish economy could lead to a major decline in buyer demand, spurring a drop in mortgage rates. That's not something any of us should be rooting for, but it's a distinct possibility.

But also, the Fed is likely to cut rates as inflation continues to cool. That could take some of the financial pressure off of lenders, leading to lower mortgage rates. And of course the 10-year Treasury won't always be as high as it is today, so that, too, could lead to lower borrowing rates for new buyers and homeowners who hope to refinance.

All told, there will very likely come a point in time when refinancing a mortgage will make sense again. It's really just a matter of when. If you're interested in refinancing, pay attention to economic conditions and rates to see when it pays to pounce.

But also, put yourself in the best position to come away a winner in a refinance by boosting your credit score, or maintaining your current score if it's high to begin with. You can give your credit score a lift by paying all bills on time and keeping outstanding credit card balances to a minimum.

Checking your credit report a few times a year is also a good idea. You never know when yours might contain a mistake that works against you, like a delinquent debt you never actually fell behind on. Correcting an error on your report could result in a credit score boost so that when refinance rates do become more favorable, you'll be in a great position to capitalize on them.