Interest rates are rising again. Did you miss the opportunity to refinance?
Don’t assume you know the answer to this question.
- The Federal Reserve just raised rates, which could make mortgages even more expensive.
- This does not necessarily mean that it is too late to refinance.
Mortgage interest rates have reached record highs amid the COVID-19 pandemic. This led to a refinancing frenzy as millions of Americans sought cheaper loans to help pay for their homes.
Things have changed drastically this year, however. Refinancing rates have risen significantly and the Federal Reserve recently raised interest rates again. Although the Federal Reserve’s overnight rate will not have a direct impact on mortgage costs, the fact that it is now more expensive for banks to borrow from each other overnight will likely have an impact. on what they charge for home loans.
Since mortgage refinance rates are usually a bit higher than new loan rates, homeowners who were hoping to change the terms of their existing debt may wonder if it’s too late to act. The answer is: it depends.
This is the crucial factor in determining if refinancing makes sense
When you refinance your mortgage, you are applying for a brand new home loan. This new loan will have a different interest rate and, probably, a different repayment term than your current debt.
The objective of refinancing is generally to reduce your interest rate, although there are also other reasons to act, such as changing from an adjustable rate loan to a fixed rate loan. This means that if you can’t get a refinance loan with a lower rate than what you’re currently paying, it’s probably not worth moving forward.
Not only do you want to lower your rate when you refinance, but you also want to make sure the change is substantial enough. This is because you have to incur closing costs during the refinance process and these can add up to several thousand dollars.
Whether you pay the refinance fee up front or build it into your loan, you’ll only want to refinance if the closing costs end up being paid for by the money you’re saving. In other words, if you save a little on your mortgage by refinancing but not enough to break even in closing costs, it’s not worth it.
Because of these upfront costs, it’s generally best not to refinance unless you can lower your interest rate by around 1.50% to 2%. And many people who got mortgages in the recent past don’t have mortgages with rates 1.50% to 2% above today’s refinance rates. In fact, some recent buyers may have a rate on their current loan that is underneath what is offered on refinance loans.
But if you got your mortgage a long time ago or you got it when you had bad credit and therefore paid a higher rate at the time based on your personal financial information, it can still be worth considering your refinancing options.
Your own situation determines whether there are still opportunities
Ultimately, there is no single answer to whether you missed your chance to refinance.
Based on current rates, you missed the lowest offers available last year. But if you can reduce the interest charges you pay or change to make your mortgage more secure, then going ahead with refinancing can still make a lot of sense.
You should carefully consider your unique goals and financial situation, as well as your belief in the likelihood of rates falling again one day, when deciding what is right for you.
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