Implications of Mortgage Refinance Trends

Mortgage refinance loans have slightly higher rates than purchase loans. 

FREMONT, CA: Very recently, mortgage rates experienced an unprecedented surge, nearly doubling within 12 months, making refinance a less practical choice for most homeowners with mortgage rates below 4 percent. There are indications that mortgage rates are stabilizing, and they ended the year below the peak of over 7 percent seen earlier in 2022. This trend suggests that recent homebuyers, in particular, may find opportunities for a rate and term refinance in the coming year.

Deciding whether refinance is the right move for you requires careful consideration. If you are ready to refinance, the key is to find the right lender for your needs. You can secure the most favorable terms by comparing mortgage refinance offers from different companies. For homeowners with mortgage rates above 6.78 percent, refinance may make sense, but refinance may not be a favorable option if your current rate is lower. Refinance from a lower-rate mortgage to a higher-rate one would result in higher monthly payments over the loan's duration, which is not desirable.

Financial experts generally advise that a refinance is beneficial if you can lower your interest rate by at least 0.75 percent, although a reduction of 0.50 percent might still be worthwhile. To determine the viability of a refinance, you should calculate the break-even point, the number of months it will take to recoup the costs associated with the refinance. 

A mortgage refinance calculator can estimate your new payment and help you decide if a refinance aligns with your financial situation. Rate and term refinance is the most common choice among homeowners, involving taking out a new loan with a lower interest rate and resetting the term of the old loan. While this type of refinance might not be the best option currently, there are other situations where refinance could be advantageous.

For instance, a cash-out refinance allows you to tap into the home equity you have accumulated over the years. Additionally, if you are nearing the end of the variable period on an adjustable-rate mortgage, refinance into a fixed-rate loan might be preferable to avoid the risk of higher interest rates. In historical context, the average rate on a 30-year fixed-rate mortgage loan is currently at 6.78 percent, according to Freddie Mac data. While this rate is lower than the average over the last 50 years, it is considerably higher than the record low of 2.65 percent in 2021.

The surge in mortgage rates between January and November 2022 was rapid and responded to the Federal Reserve's actions to combat high inflation by raising the federal funds rate. As the Fed funds rate increased, it had a ripple effect on all types of debt, leading to higher rates on personal loans, student loans, credit cards, and mortgages.