Home mortgage refinance rates have been surging higher in 2023. If you can refinance your mortgage and save at least .5% on the rate, it can be a way to save you big bucks in interest and payments over the years.
But the decision to refinance should be carefully weighed. Below are five reasons you may want to hold off on that refinance.
#1 You Are Not Going to Stay
A major consideration when considering a refinance is the break-even point. This is the time it will take for you to recover your closing costs with the new first mortgage. The break even point is determined based upon how much your closing costs are and what the new rate will be.
Closing costs are usually between 2% and 5%. It may take you several years to get back what you paid in closing costs. For instance, say your closing costs are $3000 and your payment is reduced by $50 per month. It will take a full five years for you to break even. If you want to move before that five years is up, refinancing is probably not going to be a good choice for you.
Refinancing is best for those who intend to stay in the home for years.
#2 You Have Bad Credit
What your credit score is will play a major part in determining what your new rate will be. The higher your credit score, the better your rate. If you have average or poor credit, you probably will have a higher rate. You also could have difficulty finding a lender to work with you. Getting a refinance mortgage with bad credit typically comes with a much higher interest rate.
An exception is if you are doing an FHA refinance. Rates for these government-sponsored loans are generally lower than market and are not based upon personal credit.
#3 Closing Costs Are High
Refinancing can save you on interest and monthly payments. But it does not help you if you don’t have the cash on hand for your closing costs. If you cannot come up with the money up front, you could roll the closing costs into the new loan. But this choice comes with drawbacks.
Even if the closing costs are only 2%, adding them into your loan can add several thousand dollars to your home loan. You are taking a hit on your equity and you could make your monthly payments higher. Over the years, adding closing costs to your mortgage can reduce any savings that you enjoy from the refinance. If you are unable to pay closing costs before you sign the mortgage documents, you might want to hold off on the refinance.
#4 Long Term Costs Are More Than the Savings
Refinancing will not always guarantee that you will save money. In fact, it can work against you sometimes. If you have been paying on your mortgage for several years, you have probably been paying more interest than principal. If you do a refinance into a 30-year loan to get a lower payment, you are going to be paying interest two times, even if it is at a lower rate.
Refinancing your loan into a 15-year note will shorten the repayment period, but it means you pay more each month. A higher payment could be doable now, but you have to think about if you can afford it in a few years. What if your financial situation changes? That 30% higher payment could come back to bite you on a 15-year loan.
#5 You Want to Take Out Equity
Sometimes taking out home equity is a good idea. You could use the cash to finance home improvements, start a business, or pay for college. Keep in mind, taking out a home equity loan usually accomplished the same goal as a cash out refinance, but you keep your current mortgage rate that may be much lower than today’s market conditions.
But unless you are confident that you will be able to pay your mortgage over the long term, you could be better off leaving your equity where it is. Cashing out equity can put more money in your pocket, but you could lose your home if you can’t make the payments.
Should You Take Out a Mortgage Refinance in 2023 or 2024?
Between 2020 and 2021, over 40% of mortgages in the United States were initiated, benefiting from historically low mortgage rates. The same period saw around 14 million mortgage refinances. If you were fortunate enough to secure a mortgage during that time, the current year, 2023, might not be the most favorable for considering a refinance.
Despite this, the Mortgage Bankers Association (MBA) reports that purchase and refinance applications are lingering near their lowest point since the early 2000s, a trend attributed to the significantly higher mortgage rates compared to the previous year.
This decline is unsurprising, given that a recent report from Freddie Mac reveals that the average rate for new refinance loans in the first half of 2023 reached 6.4%, a notable increase from the 4.2% average for original loans.
The motivation behind refinancing remains predominantly centered on accessing home equity, with cash-out refinances constituting nearly 90% of conventional refinance originations.
Despite almost half of mortgage-holding homeowners currently residing in homes with substantial equity, Freddie Mac anticipates subdued refinance activity for the remainder of the year.
For those contemplating a refinance to reduce monthly payments, it’s crucial to recognize that not all options result in reduced interest over the loan’s lifespan. Vernon advises, “Just because you can secure a lower rate doesn’t automatically mean you should refinance immediately. While your monthly mortgage payment may decrease, extending the life of the loan could lead to higher overall interest costs.”
Consider these Steps to Reduce your Refinance Rate this Year
- Obtain refinance rate quotes from a minimum of three lending sources.
- Inquire about the possibility of lenders waiving or lowering closing costs.
- Negotiate with your lender to match the most favorable deal available.
- Enhance your credit score through proactive measures.
- Accumulate savings for a more substantial down payment.
- Opt for a shorter-term loan to potentially secure a lower rate.
- Explore the option of purchasing discount points for added rate benefits.
You should crunch the numbers with care when you are thinking about refinancing to find out if it is a good move or not. Identifying unfavorable motivations for refinancing is crucial. While seeking a lower monthly payment is a commendable goal, it becomes counterproductive if it results in increased long-term expenditures. Transitioning to an adjustable-rate mortgage may not be a wise choice when prevailing interest rates are already historically low. Furthermore, pursuing a refinance is not advisable if the associated closing costs are beyond your current financial capacity.