Here's the One Reason It Pays to Refinance Today
Interest rates are still elevated for mortgages. But read on to see why it could still make sense to move forward with a refinance.
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For many people, the goal of refinancing a mortgage loan is to lower the interest rate on it, thereby cutting their monthly payments. But given where today's mortgage rates are sitting, many homeowners don't stand to reap savings by going the refinance route.
As of this writing, the average interest rate on a 30-year mortgage is 6.61%, according to Freddie Mac. But many people signed home loans at much lower rates in 2020 and 2021, when mortgage lenders were offering up deep discounts. And a lot of people also opted to refinance their mortgages back then. So for a lot of people, refinancing today won't result in savings.
But that doesn't mean refinancing a mortgage is a poor choice across the board. In fact, there's one specific scenario where it could absolutely make sense to refinance even with today's interest rates being not so favorable.
When you want to take cash out of your home
A traditional mortgage refinance will have you swapping your existing home loan for a new one of the same value. With a cash-out refinance, you're able to tap the equity you have in your home and use it to borrow more than your existing mortgage balance.
Here's how that might work: Let's say you own a home worth $500,000 and owe $300,000 on your mortgage. That gives you $200,000 in equity. Let's say you also want to borrow an extra $100,000 to pay off a giant credit card tab.
With a cash-out refinance, you could swap your existing $300,000 mortgage for a new home loan in the amount of $400,000. The first $300,000 would pay off your existing mortgage balance, and the remaining $100,000 would be yours to spend as you wish (meaning, you could, and should, use it to pay off your credit cards).
Because homeowners today are sitting on so much equity due to elevated home values across the country, it's a good time to try to do a cash-out refinance. When property values are lower, home equity levels tend to drop, making it harder to qualify for a cash-out refinance.
In fact, as of the third quarter of 2023, U.S. homeowners collectively had about $32 trillion in home equity. This doesn't mean that every single property owner in the country has lots of equity to tap. But many people are in that situation. And if you're one of them, and you have really expensive debt you're trying to pay off, a cash-out refinance could be a good way to go.
Let's say you have a 4% mortgage on your home and are looking at a rate of 6.61% to refinance. Clearly, 6.61% is higher than 4%. But if you owe $100,000 on credit cards charging you 24% interest, replacing that rate with a rate of 6.61% could result in savings on your total debt overall.
Shop around for a refinance lender
While it won't pay for a lot of homeowners to refinance today, if you're someone with a lot of home equity who's looking to consolidate much costlier debt, then a cash-out refinance could be a smart move. But if you're interested, make sure to compare offers from different refinance lenders.
And when you do, don't just pay attention to interest rates. Also pay attention to closing costs, which are the various fees you're charged to put a new home loan into place.
You may also want to wait a bit longer to refinance your mortgage, given that rates have been dropping steadily over the past number of weeks. Plus, the Federal Reserve may be in a position to cut interest rates in the coming months, and that could also drive the cost of mortgages downward.
Of course, if you're sitting on expensive credit card debt that's accruing interest by the minute, you may not want to wait on a refinance. But it's something to keep in mind as you make your decision.
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