Should you wait to refinance your mortgage?
Stock market declines. Rising interest rates. Climbing prices on everyday purchases like gas and groceries. It’s not enough to worry anyone.
However, that doesn’t mean that a recession is definitely going to occur in the near term. As of May 2022, economists polled by Bloomberg put the odds of a recession occurring in the U.S. over the next 12 months at 30%.
While that number has gone up in recent months, it also doesn’t necessarily mean that homeowners should panic. Big decisions like whether or not to refinance should be made with careful consideration, based on factors like your personal finance situation and risk tolerance.
In this article, we’ll dive into what homeowners should consider regarding refinancing, amidst factors like recession risks and rising rates. Given the complexity of refinancing and the current economic situation, however, you also might want to speak with a financial professional or similar advisor.
Should you consider refinancing your mortgage now?
The choice to refinance your mortgage — where you take out a new loan that pays off and replaces your existing mortgage debt — depends on the details of your current mortgage and what you’re hoping to get out of the new loan.
For many homeowners, it’s not a great time to refinance your mortgage due to rising interest rates. Depending on when you took out your mortgage, you might have gotten a better deal then, compared with what you’d get now.
Still, some homeowners might want to refinance now, as there can be several benefits. Those who have an adjustable-rate mortgage, for example, might consider refinancing into a fixed-rate mortgage or into a variable one that starts at a lower rate (keeping in mind the risks of future rate increases).
“If you are ready to consider a refinance, you can start by weighing the costs of a new mortgage against your goals for refinancing,” advises the Consumer Financial Protection Bureau (CFPB).
For example, a common goal that the CFPB highlights is “to lower your interest rate and monthly payment.”
If you can refinance to a lower interest rate, your monthly payments could decrease. Also, if you refinance to a longer loan term, you could pay less each month, though when summed up over the longer life of loan, you might pay more.
So, consider your current situation. If refinance rates are currently less than what you’re paying on your existing mortgage debt, for example, it might make sense to refinance now, before rates likely increase further. That said, you also have to weigh the costs of refinancing against factors like how long you plan to stay in your current home. The upfront costs of refinancing might not be worth it if you plan to sell soon.
Is now a good time for a cash-out refinance?
Other types of refinancing, like a cash-out refinance, could also make sense for some homeowners now, such as those who want to take advantage of soaring real estate prices without having to move. Yet some homeowners might be uncomfortable with the risks of a cash-out refinance or similar types of loans that provide access to home equity. You’re reducing the equity you have in your home and putting your home at risk of foreclosure if you can’t repay the debt.
Given that homeowners could be facing other challenges like potential job losses or higher bills due to inflation, taking on additional risk now might not be ideal. But if you’re comfortable with these risks, then accessing your home equity could help you free up cash. For example, you might use the additional funds for further real estate investments or to have more money to use during your retirement, rather than leaving an inheritance via your home equity.
Other homeowners might be tempted to wait to refinance in the hopes of getting a better deal later on. But there’s no guarantee that an economic decline would lead to a better refinancing situation, especially because of complicating factors like inflation and rising interest rates.
How would a recession affect refinancing your mortgage?
Some homeowners might be waiting to refinance in the hopes that a recession leads to more attractive terms. In many cases, that does happen, such as when the aftermath of the Great Recession led to tumbling mortgage rates. If a recession does occur soon, however, it’s unclear if the same effects will take place.
Part of the problem now is that high inflation is prompting the Federal Reserve to raise interest rates to try to cool down demand. In May 2022, the Fed raised rates by 50 basis points to 0.75-1% for the overnight rate that banks charge each other, with more increases expected in the coming months.
That might get to the point, however, of causing the economy to slow down enough to where a recession occurs. Yet interest rates could be high at that point, and the Fed might not immediately move to cut rates again, or at least do so as aggressively as they have in the past, as they need to still account for inflation. Plus, if a recession does occur, it might not be as severe as some others; current economic factors differ from those around the Great Recession, for example.
Meanwhile, the Congressional Budget Office projects interest rates on 10-year Treasury notes, which are often linked to mortgage rates, to increase through 2028, according to an outlook released in May 2022.
So, waiting to refinance won’t necessarily lead to being able to access lower interest rates. And if a recession does occur, then lenders might get more conservative, so it might not be as easy to refinance until economic conditions improve.
That said, some homeowners might find that refinancing during a recession pays off. Even if you can’t access lower interest rates, perhaps your personal finance situation means you would benefit from refinancing into lower monthly payments with a longer duration. Again, this can lead to paying more overall, but it might help some people who are struggling with cash flow due to an economic downturn.
When is the best time to refinance your mortgage?
The best time to refinance your mortgage varies among homeowners and economic situations. Market timing in general is incredibly difficult, so you might instead focus on whether or not the pros outweigh the cons.
If refinancing now enables you to reduce your worries about interest rates rising further, or if it helps you have more manageable monthly payments, for example, then it could be a good time to do so. Still, you need to think about other factors, like the upfront costs of refinancing and what the new debt means for your long-term finances.
If you don’t have a particular need to refinance now, then you might be better off waiting. Periods of very low interest rates, like what happened as a result of the pandemic, made refinancing attractive to many homeowners. Refinancing activity rose 33% in the first half of 2021 compared with the same period in 2020 and it reached a pace that hadn’t been seen in nearly two decades, according to Freddie Mac.
Now, as rates have gone up, refinancing activity has significantly slowed down. At the end of May 2022, refinancing activity fell by 75% compared with the same period a year prior, according to the Mortgage Bankers’ Association.
Refinancing isn’t your only option
Some homeowners might choose to tap into their home equity, such as through a home equity loan or a HELOC. Doing so could provide more financial flexibility, though you want to be sure you’re comfortable taking on this debt and can make monthly payments. Otherwise, you could lose your home or at the very least deal with additional stress of making ends meet.
If you are comfortable accessing your home equity, then that could be used to pay off your existing mortgage and potentially free up cash, while leaving you with more attractive debt repayment options.
Looking for a flexible alternative to traditional refinancing?
With enough home equity, you may be eligible for a Fraction Mortgage — a financing option with no required monthly payments.*
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Disclaimer: Information in this article is general in nature and not meant to be taken as financial advice, legal advice or any other sort of professional guidance. While information in this article is intended to be accurate at the time of publishing, the complexity and evolving nature of these subjects can mean that information is incorrect or out of date, or it may not apply to your jurisdiction. Please consult with a qualified professional to discuss your specific situation and confirm any information.