NEW YORK, May 9, 2022 (Newswire.com) - During the pandemic, many homeowners refinanced their home mortgage and home equity lines of credit. Now in this post-pandemic era, the Fed is announcing rate hikes to tighten the lending and refinancing environment.
With higher rates and many homeowners having recently refinanced, lenders have less incentive to offer attractive rates and terms to borrowers. However, deciding whether or not refinancing makes sense for borrowers can still be a straightforward exercise.
Generally, homeowners will want to achieve one of four goals when refinancing:
- Lower their interest rate to reduce monthly payments and interest charges over the life of the loan
- Shorten their loan term to repay the loan faster and avoid additional interest charges
- Consolidate their home mortgage and home equity loan or home equity line of credit (HELOC) into one monthly bill at a fixed rate
- Convert any variable-rate mortgage loans to fixed-rate loans for more predictable monthly payments and avoid the risk of higher market rates
Read on to see if those goals can still be achieved in 2022.
Refinancing to earn a lower rate
If borrowers can refinance their current mortgage (and any additional home loans) to earn a lower interest rate in the current environment, refinancing still makes sense.
While the Fed rate is moving up, if a borrower's personal financial outlook has improved (improved credit score, less overall debt, income has increased since their original mortgage loan) they may still qualify for a lower rate with a refinance.
Refinancing to shorten the loan's term
Likewise, if the borrower's goal is to take advantage of more monthly income by paying off their mortgage debt sooner, they're still likely to find refinanced loan options that cut down their interest rate for the shorter term.
In 2022, refinancing into a shorter-term loan will still usually find savings with lower interest rates overall (and, of course, fewer subsequent interest charges with the shorter-term loan).
Refinancing to consolidate home loans
If borrowers have both a mortgage and another home loan (like a home equity loan or home equity line of credit), they likely have two separate monthly bills featuring two separate interest rates.
If the goal is simply to turn two (or more) bills into one, refinancing will pay off their home debt and roll over the remaining debt into one monthly bill at one interest rate.
If borrowers want to include consolidation for credit card debt or other types of loan, a cash-out refinance can also help to pay off those debts - wrapping up an entire borrower's debt into one loan.
While interest rates will depend on the borrower's income and credit status, along with the amount of debt and length of loan repayment periods, today's environment can definitely continue to allow borrowers to consolidate monthly bills through a refinance.
Refinancing to convert variable-rate loans
A variable-rate loan in 2022 is starting to become a riskier proposition for borrowers. With Fed rate hikes, variable rates will likely move higher.
While lenders may not have as many options to convert a variable-rate loan to a fixed-rate loan, borrowers can likely find refinancing offers that provide a fixed rate that is higher than the borrower's current variable rate. While this can seem counterintuitive to a borrower's savings goals, it can offer the predictability of a fixed rate in an unpredictable environment.
In 2022, refinancing still makes sense
Refinancing in 2022 simply means that borrowers should take care to ensure that their refinance achieves their goals. If lenders don't offer improvements in the interest rate, term length, bill and rate consolidation, or fixed-rate conversions, borrowers shouldn't bite.
While some may sense a last gasp of the strong pandemic refinancing market, there is still time for borrowers to work with refinancing lenders to earn offers that help them align their budgets and take advantage of their home equity - but as rates rise, those opportunities may start to dry up.
Source: Bethpage Federal Credit Union