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Thinking of replacing your current mortgage with a new one? Read on to see why that may not be the best idea right now. [[{“value”:”
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The average mortgage rate as of this writing is 7.1%, according to Freddie Mac. And generally speaking, refinance rates tend to be a notch higher than purchase mortgage rates.
Because of this, now is generally not a great time to refinance a mortgage. However, you may be eager to swap your existing mortgage for a brand new one if your current mortgage rate is higher than the average rate today. Or, you may want to refinance not to lower your rate, but rather, to tap your home equity via a cash-out refinance for expenses like renovations or repairs.
Either way, you should know that refinancing a mortgage may not be the best idea right now. Here are a couple of reasons why you might regret a spring refinance.
1. You might lose out on a lower rate by not waiting for rate cuts
The Federal Reserve spent much of 2022 and 2023 raising interest rates to help slow the pace of inflation. Now, the Fed has signaled that it’s looking to cut interest rates in 2024. And while that may not happen until much later in the year, if you can sit tight a few more months and wait until the third or fourth quarter of 2024, you may find that you’re able to snag a lower interest rate on a refinance than you can get now.
To be clear, the Fed is not tasked with setting mortgage rates. However, when the Fed lowers its benchmark interest rate, the cost of borrowing tends to decline on a whole, and that extends to the cost of signing a mortgage. So if the Fed implements a rate cut or two later this year, it could lead to a more favorable refinance rate for you.
2. You might get stuck with a higher rate if you haven’t finished paying down your holiday debt
Many people routinely end up with debt during the holidays. If you racked up a credit card balance this past December and are still trying to pay it off, you may be dealing with a lower credit score as a result of your credit utilization ratio being higher than 30%. And the lower your credit score, the higher an interest rate you might get on a mortgage refinance.
Also, if you’re still carrying a pretty hefty credit card balance from the holidays, you may have a debt-to-income ratio that’s high enough to make lenders nervous. That ratio measures how much total debt you have relative to your income. On the other hand, if you spend the next few months working a side hustle and cutting your discretionary spending to pay down some or all of your credit card debt from the holidays, you may end up in a much better position to snag a more competitive interest rate on a mortgage refinance.
All told, borrowing conditions across the board aren’t great now, and that extends to signing a mortgage. So unless you have a really pressing reason to refinance your home loan this spring, you may want to hold off until later in the year — or, if possible, beyond.
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