It’s not a decision you want to make lightly.
- It’s usually not a great idea to refinance when interest rates are high, but there can be some situations where it might make sense.
- If refinancing isn’t a good fit for you, there are other things you can try to reduce your mortgage payment.
Refinancing your mortgage can help you save money and possibly pay off your home more quickly. But it’s not something you want to do on a whim. Refinancing has serious implications for your finances, and some times are better suited to it than others.
As we look ahead to 2023, you might be thinking about whether refinancing your home next year is a smart move. Here’s what you need to know.
Interest rates are still climbing
The Federal Reserve has hiked the federal funds rate several times throughout 2022 in order to combat inflation. Essentially, what this does is make it more expensive for banks to borrow money from each other, and it usually causes banks to increase the interest rates on its own products as well. That’s great news if you have a savings account because your annual percentage yield (APY) will probably increase. But it’s not great news for borrowers seeking loans.
Higher interest rates mean you pay more to the bank in interest on what you borrow. This raises both your monthly payment and how much you pay over the duration of the loan. Even a small increase can make a significant difference when we’re talking about a mortgage worth hundreds of thousands of dollars.
It’s impossible to say if interest rates will fall in 2023, but that’s unlikely to happen until the rampant inflation we’ve been dealing with is under control. If you were to refinance an existing mortgage when rates are still high, there’s a strong possibility you end up paying more money than you would by keeping your existing loan. But there are exceptions to every rule.
Who may want to refinance in 2023
Refinancing mortgages was popular in 2020 and 2021 when interest rates fell due to the pandemic. A lot of people chose to refinance then because they could lock in a lower rate than what they initially paid. If you purchased your home or refinanced at that time, you probably have nothing to gain from refinancing in 2023.
Discover: We ranked this company the Best Overall Mortgage Lender as a part of our 2022 Best-of Awards
But if you purchased a home back in 2008 and haven’t refinanced since, it’s possible you could find a more affordable rate by refinancing now. This is especially true if you’ve improved your credit significantly. Lenders take your credit score into account when setting interest rates, and they charge those with higher credit scores lower rates because they’re less likely to default on their loan.
Other ways to save on your mortgage
If refinancing isn’t a good fit for you right now, that’s OK. There are still other things you can do to reduce your monthly mortgage payment. If you’re not in a hurry, you could wait to refinance until rates drop again.
In the meantime, you could try a loan modification if you’re unable to keep up with your mortgage payments and are worried about foreclosure. This is where you work with your lender to reduce your monthly payment, often by lowering your interest rate or extending the loan term. You must demonstrate significant financial hardship to do this, and the modification you’ll get will depend on your lender and your personal situation. But oftentimes, banks are willing to work with you because it can be a big hassle for them to foreclose upon a home.
If you choose to do this, be sure to ask your lender about any associated costs and read the fine print so you understand what you’re signing up for. You may still want to keep an eye out for a good time to refinance in the future if you think you can reduce your costs even further.
The Ascent’s Best Mortgage Lender of 2022
Mortgage rates are at their highest level in years — and expected to keep rising. It is more important than ever to check your rates with multiple lenders to secure the best rate possible while minimizing fees. Even a small difference in your rate could shave hundreds off your monthly payment.
That is where Better Mortgage comes in.
You can get pre-approved in as little as 3 minutes, with no hard credit check, and lock your rate at any time. Another plus? They don’t charge origination or lender fees (which can be as high as 2% of the loan amount for some lenders).