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Mortgage Refinancing: Current Trends and Alternatives

At O1ne Mortgage, we understand that mortgage refinancing may not be a viable option for homeowners in the near future. During the 2010s, cash-out refinancing was a popular method to access home equity, thanks to steadily declining rates for 30-year fixed mortgages. By 2018, cash-out refinances had surpassed traditional rate-and-term refinances, according to Freddie Mac.

However, with mid-2023 mortgage rates averaging around 6.75%, refinancing for a larger mortgage is not beneficial for most homeowners. Many borrowers currently enjoy much lower rates than the national average, making refinancing less attractive, even if it results in extra cash.

When to Consider Refinancing

Historically, refinancing made sense when the new loan’s rate was at least 1 percentage point lower than the current mortgage rate. Homeowners also had to consider closing costs and the potential of resetting the mortgage term to another 30 years. Today, experts predict that mortgage rates will remain between 6% and 7% for the foreseeable future.

Majority of Mortgage Debt Has Sub-3% Interest Rate

Current rates are not low enough to benefit most homeowners through refinancing. Over half of mortgage holders have rates of 4% or lower, according to Freddie Mac. A return to 3% or 4% fixed-rate mortgages seems unlikely for years, if ever.

Exploring Home Equity Options

While cash-out refinances may not be advantageous, homeowners can still benefit from home equity loans or home equity lines of credit (HELOCs). Even with higher interest rates, these options can result in lower overall interest payments, especially for those with significant equity on a low-rate mortgage, as noted by the Center for Responsible Lending and American Enterprise Institute.

According to Black Knight, U.S. homeowners have nearly $16 trillion in home equity, with over $10 trillion considered tappable. This equity can be accessed through home equity loans or HELOCs, providing financial flexibility.

Considerations for Home Equity Loans and HELOCs

Despite the potential benefits, home equity loans and HELOCs remain underutilized. Homeowners may hesitate due to the risk of foreclosure if unable to repay these loans. Additionally, banks are cautious about offering these loans, as they remain on their books and require property management in case of foreclosure.

Nevertheless, Experian data shows a gradual increase in HELOC popularity. These loans offer competitive rates compared to personal loans and are tax-advantaged if used for home improvements. They are also useful for debt consolidation due to lower APRs compared to variable-rate credit cards.

To improve your chances of securing a HELOC or home equity loan, maintain a good credit score, manage your debt-to-income ratio, and ensure timely loan payments. Be aware that home prices have declined in some regions in 2023, which may affect your equity.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. Our team is ready to assist you with confidence and expertise.

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