Ask Yourself These Questions Before Applying to Refinance Your Mortgage in 2024

In 2020 and 2021, when mortgage lenders lowered their rates, many homeowners rushed to refinance their mortgages. But rates have climbed a lot since then, so these days, refinancing a mortgage is a less appealing option.

The average cost of signing a 30-year mortgage loan today is 6.6%, according to Freddie Mac. And mortgage refinance rates are often a notch higher than purchase mortgage rates, which means that if you’re looking to refinance today, you might pay a bit more.

But even though mortgage rates are elevated these days, that doesn’t mean refinancing is automatically a poor choice. So before you write off the idea, ask yourself these questions.

1. Has my credit score improved a lot since putting my mortgage in place?

Your credit score tells lenders (mortgage and otherwise) how risky a borrower you are. If your credit score has improved notably since putting your current mortgage in place, you may be eligible for a lower interest rate on a mortgage than the one you originally locked in, despite today’s borrowing rates generally being high.

On the other hand, if your credit score isn’t in the best of shape these days, then it may not be a good time to refinance — even if the interest rate on your current mortgage is higher than the average rate being offered by lenders today.

That said, you may be able to boost your score by doing things like paying bills on time and checking your credit report for errors.

2. Do I have high-interest debt I need to pay off?

Let’s say you have a 3% mortgage now and the best refinance rate you can qualify for is 6.7%. You might think that refinancing is a silly idea. But it may not be if you have high-interest debt you’re trying to pay off, like a credit card balance.

Let’s say you owe $100,000 on a mortgage with a 3% interest rate, but you also happen to owe $100,000 across a bunch of credit cards charging 17% to 24% interest. If you refinance to a $200,000 mortgage (which may be possible with a cash-out refinance), your remaining $100,000 home loan balance will get more expensive. But you’ll lower the rate on your credit card debt a lot. So all told, you may find that refinancing allows you to lower the interest rate on your debt overall.

3. Am I looking to do a major home improvement that will better my daily quality of life?

Maybe your family has grown since you bought your home, and having a finished basement would give you all much more room to spread out. Or maybe you desperately need another full bathroom in your house, but you don’t have the $35,000 it’ll take to build it just sitting in a savings account.

As is the case above, a cash-out refinance could make sense in this situation. You might end up making your mortgage more expensive. But in exchange, you’ll get access to money that could allow you to complete a project that will greatly improve your quality of life. And remember, you could always refinance again to a lower interest rate in a few years if borrowing becomes more affordable at that point.

For many people, it won’t make sense to refinance a mortgage in 2024. But ask yourself these questions to see if you’re an exception.

This article was written by Maurie Backman from The Motley Fool and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to [email protected].