The value of homes in America has been skyrocketing over the past year. There are a number of reasons for this, including the severe lack of supply caused by construction shortages and lack of sellers. However, the reason that demand is high even after a devastating pandemic is that interest rates reached almost record lows. Currently at just 0.25%, interest rate hikes are expected in 2022, which will almost certainly cause home values to stagnate.

If you’re looking at the low interest rate and thinking it might be a good idea to refinance your mortgage, that’s understandable. In theory, you could get a much lower interest rate than you are currently paying, even if you opt to get a cash payment as well.

Should you refinance your mortgage? Refinancing your mortgage is not a difficult matter, but it is something you shouldn’t jump into without the full context. Older Americans who have reverse mortgages in retirement can refinance reverse mortgage to save on annual interest and even take advantage of higher lending limits released by HUD in early 2022. Here are some of the factors to take into account when deciding whether to refinance your mortgage.

Your interest rate is high

If you bought your home within the past five years, you probably got an interest rate that is much higher than the current mortgage rates. The average 30-Year Fixed-Rate Mortgage rates in 2019, was as high as 4.46% for example, which is 60% higher than the current rate. Will refinancing your loan now get you a lower interest rate?

That really depends on the quotes you are able to get. You can shop around for home loan refinancing options and get many different rates. Even if you don’t get the qualify for lowest rates, your original loan was probably somewhat higher than the rates at the time.

Shopping around for refinancing loans will give you a clear indication of whether it may be worth it to start the process. However, a lower interest rate does not necessarily make refinancing worth it. Your new mortgage may cost thousands of dollars. As such, the lower interest rate may not make a difference in the long run. You may be paying slightly lower monthly payments while refinancing for a longer term.

You need cash

Refinancing is not just about getting a better interest rate. Many people refinance their mortgage because they need an influx of cash. Especially now that prices are going up so much, you can get a significantly higher home loan than you may have gotten when you bought your home. Instead of settling for the amount that will cover your previous loan, you can get a home loan that goes a bit further and take the difference in cash.

This is a way of taking out a cash loan at a much lower rate than you would have gotten for a personal loan. It is a popular way of tapping into equity during normal times. Now that home values are so high and interest rates so low, it may be particularly enticing.

You want to consolidate your debts

In a similar vein, you may decide to use a refinancing loan to consolidate some major debts in your life. If you have thousands of dollars in credit card or loan debt, you’ll be paying high interest rates every year that make it difficult to ever get back on even terms. Refinancing your home and using the money to pay your old debts can save you a significant amount of money. You’re still paying for those debts, but instead of paying over 20% interest, you’ll be paying in the single digits.

The downsides of refinancing

There are downsides to refinancing. However, for the most part, they are things which take away from the benefits of refinancing rather than issues that will cause you harm. 

Refinancing to tap into your home equity will necessarily set you back on your home payments and is the obvious downside there. Also, there are pricey closing costs on any mortgage. Refinancing extends the length of mortgage, which means you will be in debt longer. You also run the short term possibility of it lowering your credit score You may get a great interest rate that will save you a lot of money, only to find that you barely break even because of the extra costs.

Should you refinance?

If you see yourself refinancing your home in the future for whatever reason, it may be wise to do so now. There are likely three interest rate hikes set to come about in 2022, which will take the Feb rate over 2%. At that point, you will struggle to get an interest rate on a refinancing loan that actually saves you money.

However, if you have no reason to refinance as you already have a good interest rate, there is no great benefit to rushing into a refinancing loan. Tiny percentage points won’t get you far considering the closing costs you’re going to have to pay.