How Will Rising Interest Rates Affect Your Mortgage Refinance?
Average rates for a 30-year, fixed-rate mortgage have outpaced all expectations thus far in 2022, hitting as high as 5.81% in late June. At the time of this writing, interest rates have slipped backward slightly to 5.30%, but that is still nearly double the rate of 2.8% from just a year ago.
As a result, the question on every homeowner’s lips who is thinking about refinancing is – how high will the interest rate get?
Predictions May Be Hard to Pin Down
If you listen to the experts, the predictions can vary. Ask some and you will hear the interest rate for a 30-year, fixed-rate mortgage will most likely stay just above 5% from now until the end of the year, but ask some others and you’ll hear that they’ll continue rising to as high as 7% by the end of 2022.
So, if the latter prediction comes true, how will the rising interest rates impact homeowners’ mortgage refinance options?
The Refinance Race is On?
The first quarter of 2022 saw the largest quarterly interest rate climb in 28 years. You would think that with rates rising so quickly, homeowners by the scores would have been racing to save money on their loans by refinancing before rates get too high. But what happened was the reverse. Rate-and-term refinance activity dropped by a whopping 80 percent in the first quarter of 2022, according to mortgage data firm Black Knight.
The biggest problem facing homeowners looking to refinance is that every time the rates inch up, fewer of them will be able to save money by refinancing. Making matters worse is that to obtain the lowest possible rate, refinance-eligible borrowers need to have a minimum credit score of 720, at least 20 percent equity in their home, and the ability to secure a rate that is at least 0.75% lower than their current interest rate.
What About Homeowners Who Want to Refinance for Other Reasons Besides Saving Money?
While saving money is one of the most common reasons to refinance a mortgage, not everyone refinances to lower their monthly payments. For instance, many homeowners choose cash-out refinances. In fact, during the first quarter of 2022, cash-out refinances accounted for 75 percent of all refinances.
With this type of refinance, the new loan is for more than the amount they owe on their home. This allows the borrower to take the difference in cash, which can then be spent on things like home renovation projects, debt consolidation, medical bills, or tuition, among other things.
For these types of borrowers, the rising interest rates will result in them having to accept lower loan amounts than they might desire because the higher interest rates will increase the amount of their monthly payments. For many, the amount of cash they will be able to take over their mortgage balance may not be worth the cost.
A home equity line of credit is an alternative that some homeowners looking to access cash by refinancing might instead pursue, but HELOC rates are also on the rise this year. As a result, they will most likely find themselves in the same position when applying for a fixed-rate home equity loan.
Of course, one way to look at it is that interest rates on cash-out refinance, HELOC and home equity loans tend to be lower than rates on credit cards and personal loans, so depending on the borrower, leveraging their home’s equity can still be a compelling option even as rates rise.
Is Now the Time to Pull the Refinance Trigger?
In the best-case scenario, interest rates will stay close to where they are right now until the end of the year. But that’s not guaranteed. They are just as likely to rise to close to 7 percent. The only thing everyone can agree on is that while the rates will fluctuate, the odds are that they aren’t going to come down by any significant measure this year unless something happens to lower inflation.
So, if you are thinking about refinancing your home loan in 2022, and you meet the qualifications listed above, then you should apply for your loan sooner than later or you might regret it.
