Now is not a good time to refinance your mortgage, except for this specific reason

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This may apply to you.


Key points

  • It’s best to refinance a mortgage when borrowing rates are low.
  • That’s not the case today, so refinancing won’t make sense for many borrowers – but there are exceptions.

There’s a reason homeowners rushed to refinance their mortgages from mid-2020 to late 2021. Meanwhile, mortgage rates have dropped to extremely competitive levels, and that’s inspired many to go out and save money by swapping their existing home loans. for the new ones.

But over the past six months, mortgage rates have risen at a rapid pace. And now getting a mortgage is more expensive than it has been in years.

As such, it generally doesn’t make sense for homeowners to refinance a mortgage today. But there is an exception to this rule, and it may apply to you.

When you want your home to serve as a source of cash

When we think of refinancing, we can imagine a typical refinance, where you trade a loan with a balance of $240,000 for a new one with that same balance. But there is another type of refinancing that might appeal to some homeowners and might make sense today, despite higher borrowing rates.

It’s called a cash refinance, and it’s a decision that makes sense for homeowners who have a lot of equity in their properties. And these days, that’s the case all over the country.

As home values ​​have skyrocketed over the past two years, many homeowners are sitting on record levels of home equity. This is equity that some may want to leverage by borrowing against their home.

Now, if you want to go this route, you have various options. You can apply for a home equity loan or a line of credit (HELOC), which will not replace your mortgage. Or, you can do a cash refinance, where you swap your existing mortgage for a new one with a higher loan balance.

Say you owe $240,000 on your mortgage, but want to borrow $60,000 of your home equity to fund a series of planned renovations. With a cash refinance, you would take out a new $300,000 mortgage. The first $240,000 would be used to pay off your existing loan, and the remaining $60,000 would be paid to you in the form of a check.

Should you refinance in cash today?

If you refinance your mortgage today, you may not get the best mortgage rate. But the interest rate you get on a cash refinance may be more favorable than the interest rate you’ll get on a home equity loan or HELOC. And if you’re eager to tap into your home’s high equity, a cash refinance might be a good idea.

However, if you plan to do a regular refinance, that’s another story. Your credit score may have improved so much since you signed your original mortgage that you will now have a lower rate than you did when you first got that loan. But otherwise, borrowing rates are quite high today compared to what they were in recent years. And for that reason, it’s usually beneficial to put off a regular refinance now and wait for rates to come down.

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Mortgage rates are rising — and fast. But they are still relatively low by historical standards. So if you want to take advantage of rates before they get too high, you’ll want to find a lender who can help you get the best rate possible.

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