Reacting to a pandemic, the U.S. Federal Reserve launched a monetary policy that pressed mortgage rates astonishingly low — at one point they dipped below 3%.
In late 2021, the Fed did an about-face. And the rates shot up.
The Fed doesn’t manipulate mortgage rates directly — but banks generally raise their interest rates following the Fed’s moves. This year, rates have soared beyond most analysts’ predictions and are currently in the 7% range.
So let’s get straight to the question. Is it too late to refinance now?
What Factors Support a Mortgage Refinance in 2022?
Mortgage rates are still on the rise. For many people who already have their mortgages, getting a new loan in the 7% range is not at all desirable. Most people who have fixed-rate home loans today are paying quite a bit less than 7%.
Only people who can reduce their interest rates from, say, 8% to 7.25% are likely to find refinancing worth the effort.
This is a let-down for the homeowner who’s been hoping to turn in their 30-year loan for a 15-year fixed-rate mortgage. Or for those who have built up 20% equity in their homes and now qualify to refinance and remove PMI from their monthly mortgage payments.
Some have no choice but to apply for new loans. For example, they might be refinancing because they have promised to remove a co-borrower from the title in order to take over the home as its sole owner.
☛ Is refinancing a necessary step in changing the deed from co-ownership to sole ownership? Read more about the three ways to take a co-borrower off a mortgage.
Now, many homeowners are understandably delaying their refinancing plans. Some are thinking about revisiting their refi plans in 2023. Will that work? It depends on what twists and turns this chaotic economy takes next.
Will 2023 Be Better for Refinancing? Or Will Mortgage Rates Keep Going Up?
Rates could easily continue their march upward through 2022 and into 2023. How high could they go? Again, follow the Fed. As our central bankers can’t get a grip on inflation by their actions so far, they plan to keep hiking their interest rates. And mortgage rates will keep echoing what they do.
Today’s 7% rates are as high as they’ve been in 15 years. And the last time they rose so fast, we were in the early 1980s. At that time they soared over 18%!
Could that happen again? It’s not expected to happen. Most industry analysts (and the Fed) believe inflation can be tamed and the Fed will ease up on interest rates. If we see “deflation” they might even lower their rates. There’s little anyone can do but watch and wait.
Related Question: What Will the Real Estate Market Look Like in 2023?
The financial intelligence firm Moody’s Analytics predicts U.S. home prices will stay absolutely flat next year. If the prediction is right, that’ll be a big change from what we have witnessed since 2021. During this past year, the average home across the United States has gone up nearly 20% (in some places, way more). A pause in the rising cost of a house will be very welcome to buyers. Many have been sidelined for years, hoping the market will finally wilt.
Will it wilt? Likely not. There is simply too much need and too few homes to go around. This means demand will be prolonged, and many people will continue to be priced out.
Refinancing Takes Courage Even In the Best of Times
A refi means paying application fees, title search fees, loan origination costs, and closing costs. Whether these costs are upfront or rolled in, they are there. And they will eat into any savings that the new loan might bring. Plus, the lender may order an appraisal and inspection. Where there’s a document to be notarized and filed, there’s a fee. Everything adds up. It’s not uncommon for a homeowner to pay 6% of their debt just on the costs of trading one loan for another.
And another thing. Homeowners’ credit profiles change over time, so the lender will need to vet the borrower’s credit and factor that into the new rate.
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But that’s still not all. Refinancing a loan means putting a new loan in place, resetting the term of years. This means the borrower could wind up extending the life of the debt.
In the long run, refi savings can be much less than they seem at first look.
What Are the Chief Alternatives to Refinancing?
There are other ways to revamp monthly loan obligations — ways that don’t require paying off a current loan and putting a whole new loan in its place. The simplest example is making higher monthly payments. Most mortgage agreements let the borrowers make extra payments to cut down the loan principal. This means the loan will be paid off faster.
All the borrower has to do is pull up the mortgage servicer’s website, and opt to make an extra payment. The borrower can do it in one of two ways:
- Pay a lump sum on the loan principal. This lowers the remaining balance. Then, by continuing monthly payments as usual, the borrower makes the full payoff earlier, cutting out a certain amount of interest.
- Pay a little more into the principal each month. This is a matter of adding $100 or $200 extra or more to the monthly auto payment, for as long as the borrower feels comfortable making the extra payments.
By accelerating the pace of payment, the homeowner can significantly reduce the total interest that must be paid over the loan’s life.
When In Doubt, Ask a Mortgage Pro
Refinancing makes sense only if the timing is right. And right now, the timing is wrong for the vast majority of U.S. homeowners. No wonder mortgage demand is down 29% overall from its 2021 levels.
According to the data firm Black Knight, by the time mortgage rates topped 6% last month (Sept. 2022), fewer than a half-million people with home loans were in the position to improve their loans by refinancing. That was already the lowest number ever recorded.
If you have more questions about your options, call up your mortgage servicer. It’s the quickest way to get professional guidance that takes your personal set of circumstances into account. After all, it’s the individual situation, not what the market and media say, that matters most when it comes to having the mortgage that fits.
Supporting References
Leslie Cook for Money.com (a website of Money Group, LLC): Is Now a Good Time to Refinance Your Mortgage? (updated Oct. 6, 2022).
Clare Trapasso for Realtor.com: (a website of the National Association of REALTORS®): How High Can Mortgage Rates Possibly Go? (Oct. 11, 2022).
Diana Olick for CNBC.com: Real Estate – Mortgage Demand From Homebuyers Falls 29% Since Last Year, as Interest Rates Surge Past 6% (Sep. 14, 2022).
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Photo credits (both): Kampus Production, via Pexels.