What You Need to Know About Refinancing in Today's Market

Uncovering the Market Conditions for 2023

These days, many people are hesitant to purchase a home because they will be incurring a higher interest rate. When I say higher, that is in relation to the historically low interest rates that we had during the pandemic. It is especially a daunting idea when the person looking to get a new home was able to finance their loan on their current home at an “attractive” rate. I put quotations around attractive because attractive is relative to the person acquiring the loan. A rate of 4.5% would be attractive to someone with a 6% rate, conversely a 6% rate would also be attractive to someone with a 7% rate. It is important to understand the costs of refinancing so that you are not as concerned with buying a home in today’s market knowing that the probability of being able to refinance in the near future with more attractive rates increases every single day.

The goal is to cover the current market conditions for refinancing a home in 2023, how much it would cost to refinance a home in today’s market, and the benefits and risks of refinancing a home. By the end of this post, you should have a good understanding of whether or not refinancing is right for you.

The Current Market Conditions for Refinancing a Home in 2023

With record inflation (although continuing to trend down) and rates still hovering near their highs, many people are wondering what the current market conditions are for refinancing a home. The Fed is doing what it believes is best to ensure that inflation is not entrenched in the economy, so their tighter monetary policies directly put the housing and financial markets in a precarious position since they are dependent on the movement of capital and the borrowing of money. With the housing market making up roughly 17% of the United States’ GDP, it is easier to understand how the Fed can achieve some of its financial goals by making it more difficult to borrow money in that industry. By the Fed increasing rates and maintaining those elevated levels, it slows individuals, families, and investors down from buying homes, which allows the housing market to catch up to demand, and that typically leads to less volatile housing prices long-term. Although their monetary policy impacts many more industries than just the housing market, I am using it as an example as it directly relates to the topic of this article.

What does all of this mean, you might ask? It means by the Fed making it difficult to borrow money, it makes people less likely to buy and build a home which means supply can catch up to demand. So, once the Fed achieves its financial objectives (i.e. lower inflation, equilibrium in supply and demand, softer labor market, etc.), it should begin to make borrowing money more accessible and affordable. With data showing that inflation is continuing to drop, this may allow the Fed to stop increasing interest rates within the next few months and become more dovish on their policy stance. Dovish means creating a monetary environment that supports cheaper money, thus making mortgages and borrowing rates lower.

How Much Would It Cost to Refinance a Home in the Current Market?

The cost of refinancing depends on a few factors, such as your credit score, loan term, and loan amount. However, on average, you can expect to pay around 3% of your loan amount in closing costs when you refinance your home. The costs will typically fall between 2–5%, so 3% gives the average person a rough estimate on how much capital they would need to refinance.

For example, if you are looking to refinance a $200,000 loan, you can expect to pay around $6,000 in closing costs. Of course, your costs, rates, and points may vary depending on your specific situation, so it is important to talk to a lender to get precise costs for your unique scenario. It is also important to note that refinancing can take up to 30 to 45 days to complete. So, just know that if you are looking to save money immediately, refinancing is a long-term play that can save you thousands of dollars in the future.

What Are the Benefits of Refinancing a Home in this Market?

When you refinance your home, you have the opportunity to choose new loan terms that better fit your financial situation. For example, if you originally agreed to a 30-year loan but now feel like you can handle a shorter 15-year loan, refinancing gives you the chance to change up your repayment timeline without taking out an entirely new loan. You can also choose to refinance from an adjustable-rate mortgage (ARM) into a fixed-rate mortgage, which can offer peace of mind if rates continue to rise. Also, if you have some equity built up in your home, refinancing gives you the ability to “cash-out” and use some of that money however you see fit. But, please try to make sure you are using that equity from your home to either put towards other investments or to pay off high-interest debt. There truly are plenty of benefits that come along with refinancing your home — you just have to weigh those benefits against the costs (i.e., closing costs, current rate to acquired rate, etc.) to see if it makes sense for your unique situation. If it does not, then do not waste your time and resources on the costs of refinancing if it does not align with your financial picture, lifestyle, and personal goals.

*This is not financial advice. For educational purposes only.