Is it worth it to refinance at a higher rate?
If you have a lot of high-interest debt, getting a cash out refinance at a higher interest rate than your current mortgage rate might make sense. With a cash out refinance, you replace your current mortgage with a new mortgage for a higher amount and get the difference in cash at closing.
As such, refinancing might not be worth it if: You've been paying your original loan for quite some time. Refinancing results in higher overall interest costs. Your credit score is too loan to qualify for a lower rate.
- Closing Costs. Refinancing your mortgage will come with closing costs of 2% to 6% of the new loan amount. ...
- Potential Negative Impact on Your Credit Score. ...
- Potential for a Longer Loan Term or More Debt.
Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months.
If you can't lower your existing mortgage rate, a refinance likely won't make sense. In this case, paying extra on your mortgage is a better way to lower your interest costs and pay off the loan faster. You want to own your home faster.
In most cases, it makes sense to refinance to a new home loan only if the interest rate on the new loan is a lower one. After all, interest is the cost to borrow, and it may make little sense to take out a new loan that charges you more for the debt you've taken on.
But when current mortgage interest rates soar above where rates were when you first took out your loan, refinancing will likely lose you money. But if your monthly mortgage bill has become unaffordable or you need a lot of money quickly, homeowners still have options that won't chain you to a higher rate.
If you opt to have the closing costs rolled into the new mortgage, you're augmenting the mortgage balance — the amount you owe — and thus diluting your equity — the amount you own. Similarly, a cash-out refinance can impact your home equity.
The Bottom Line: The Best Time To Refinance Depends On Your Financial Situation. Refinancing your mortgage is a big decision. It relies heavily on your circ*mstances and the mortgage market. While current rates have increased from the 2020 lows, they're still competitive compared to pre-pandemic years.
Some borrowers are able to reduce the term of their loan by refinancing. If you are a borrower who has had your loan for a number of years, a reduction in interest rates can allow you to move from a 30-year loan to a 20-year loan without a significant change in monthly mortgage payments.
Does refinancing mean starting over?
Because refinancing involves taking out a new loan with new terms, you're essentially starting over from the beginning. However, you don't have to choose a term based on your original loan's term or the remaining repayment period.
Expect to pay around 2% – 6% of your loan balance in closing costs. You may be able to roll your closing costs into your loan balance, depending on your lender's requirements. Known as a no-closing cost refinance, it doesn't require you to pay any closing costs upfront.
In many cases, there's no waiting period to refinance. Your current lender might ask you to wait six months between loans, but you're free to simply refinance with a different lender instead. However, you must wait six months after your most recent closing (usually 180 days) to refinance if you're taking cash out.
Mortgage Refinance
Your monthly housing bill can decrease if you refinance to a lower interest rate or a longer loan term. However, if you refinance to a shorter loan term (for example, from a 30-year to a 15-year home loan) to pay off your home faster and save on interest, your monthly payment will go up.
| Product | Rate | Change |
|---|---|---|
| 30-year fixed | 7.25% | +0.15 |
| 15-year fixed | 6.61% | +0.13 |
| 30-year jumbo mortgage rate | 7.32% | +0.16 |
| 30-year mortgage refinance rate | 7.28% | +0.09 |
Refinancing the mortgage on your house means you're essentially trading in your current mortgage for a newer one – often with a new principal and a different interest rate. Your lender then uses the newer mortgage to pay off the old one, so you're left with just one loan and one monthly payment.
If you purchased your home or refinanced at that time, you probably have nothing to gain from refinancing in 2023. But if you purchased a home back in 2008 and haven't refinanced since, it's possible you could find a more affordable rate by refinancing now.
Mortgage rates are expected to go down in 2024, but so far this year they've been stubbornly elevated. Average 30-year mortgage rates rose last week and remain a bit higher than last month's average, according to Zillow data.
If your goal is to get a lower interest rate, right now isn't the best time to refinance. You're likely to end up with a higher rate, plus you'll need to pay closing costs on your new mortgage. If you can hold off, mortgage rates are expected to slowly trend down over the next couple of years.
Cash-Out Refinance. You don't need to change your rate or term when you refinance – you can also take money out of your home equity with a cash-out refinance. You accept a higher principal loan balance and take the difference out in cash when you take a cash-out refinance.
Is it bad to buy a house when interest rates are high?
No one likes it when interest rates go up, but it's not the end of the world. This is still a great time to buy a house—you'll just pay more than you would've a couple years ago. It's also a good time to sell a house. And if you already have a fixed-rate mortgage locked in, you're in good shape too.
Why does refinancing cost so much? Closing costs typically range from 2 to 5 percent of the loan amount and include lender fees and third-party fees. Refinancing involves taking out a new loan to replace your old one, so you'll repay many mortgage-related fees.
Yes, you can sell your home after refinancing, but you may end up losing money on the refinance if you sell before you reach the breakeven point or you're subject to a prepayment penalty. You may have to wait if your mortgage contains an owner-occupancy requirement.
Your servicer wants to refinance your mortgage for two reasons: 1) to make money; and 2) to avoid you leaving their servicing portfolio for another lender. Some servicers will offer lower interest rates to entice their existing customers to refinance with them, just as you might expect.
Bottom line. A cash-out refinance can be a smart way to pay for home improvements and renovations or pay down high-interest debt. That said, you need to have adequate equity in your home, and ideally, get the lowest possible rate. Otherwise, an alternative option, like a home equity loan, could be a better choice.
