With Record-High Mortgage Rates, Does It Still Make Sense To Re-Finance?

Mortgages are more expensive than they have been since 2001, with average rates for 30-year fixed mortgages now higher than 7%. In this market, it would seem to make little sense to re-finance your mortgage.

There are, however, a number of specific circumstances in which re-financing might still make sense. You can re-finance in order to free up some of your equity to pay back other debts, or to extend your mortgage term.

High Interest Rates Discourage Refinancing

First, the bad news. The price of a mortgage today is higher than at any point since 2001. More specifically, in the week ending October 26, the average rate for a 30-year fixed mortgage reached 7.16%, according to the Mortgage Banker’s Association. This was the tenth consecutive week that rates have risen.

The high cost of mortgages is driving a broad downturn in the mortgage market, and is affecting both new mortgages and re-financing. New mortgage originations are down 42% on the same week last year, and re-financing is down 86%. That’s not surprising, because the most common reason for people to re-finance their home is to benefit from a lower interest rate, and very few people are paying a higher rate than the current one.

In fact, according to Black Knight’s Mortgage Monitor, there are currently just 133,000 US homeowners who could secure a lower interest rate via re-financing. This is the smallest number since 2000, and is only likely to include people who got their mortgage before 2008.

Why Re-Financing Might Still Make Sense

There are some other reasons why you might consider re-financing your home, though. Paying 7% interest might be a record-high for a mortgage refi, but it’s still relatively low in comparison to other forms of credit. Plenty of car loans charge 8% interest or more, for example, and the average interest rate on personal loans is over 10% according to the Federal Reserve Bank of St. Louis. The average credit card interest rate was most recently quoted at 16.27% by the Federal Reserve.

If you have high-interest debts like these, it could be an option to re-finance your mortgage and use it as a lower cost debt consolidation loan in order to pay down these obligations. Similarly, if you need cash for home improvements, you might be able to borrow it via a re-finance at a significantly lower rate than a personal loan.

A popular way of doing this is via a cash-out refinance, which converts your home equity into cash when you take out a new mortgage for more than your previous mortgage balance, and the difference is paid to you in cash.

A second reason to re-finance, even with high interest rates, is to extend your mortgage. If you’re already 20 years through a 30-year mortgage, for example, you can extend your mortgage in order to lower your monthly payments. This also frees up cash without decreasing your equity, as long as you are willing to take on a potentially higher interest rate on the loan and pay it off over a longer period of time.

Just make sure that you shop around, because re-financing deals can variably considerably between lenders, and check out our list of the best mortgage refinance companies.