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    While still on the lower end of the 30-year scale, interest rates have risen to about 6.8%, reaching levels significantly higher than 2021 when rates were as low as 2.96%. At the same time home prices have surged to all-time highs, and inventory remains very tight.

    These market conditions have left many homeowners contemplating whether refinancing their home loans still makes financial sense. With that in mind, we’ve brought you five questions to help you determine whether refinancing your mortgage is the right move for you. Keep reading to learn more.

    Before you refinance your mortgage: What to ask yourself

    1. What is my goal?

    Before beginning to refinance your mortgage, it’s important to have a firm goal in mind for this process. Given the current market dynamics, your goals may need to adapt to the new reality:

    • Reduce your monthly payment: With interest rates higher than before, reducing your monthly payment might be challenging. However, if you can secure a lower rate than your current one, you may still be able to save on your monthly mortgage expenses. Or, you can try a rate-and-term refinance.
    • Reduce the time you’ll spend making payments: While higher interest rates may discourage shorter loan terms due to increased monthly payments, if your financial situation allows, opting for a shorter term can still save you money on interest over the life of the loan.
    • Give your payments more stability: With interest rates on the rise, switching from an adjustable-rate mortgage (ARM) to a fixed-rate one can provide stability and protection against future rate increases, even if the initial fixed rate is higher than what you currently have.
    • Leverage your home equity: Despite higher home prices, if you have substantial equity in your home, a cash-out refinance can still provide funds for significant expenses, albeit at a higher borrowing cost than in previous years.

    2. How much disposable income do I have at the moment?

    With higher interest rates, the cost of refinancing has also increased. Closing costs, which typically range from 2% to 5% of the loan amount, will be higher for homeowners refinancing in today’s market. It’s essential to assess your current financial situation and determine how much you can afford to allocate to closing costs.

    Suppose you’re refinancing a $300,000 mortgage. At a 4% closing cost rate, you would need to pay between $12,000 and $15,000 in closing costs. Rolling these costs into your loan will increase your monthly payments further. For example, at a 30-year fixed at 6.5% your monthly payment would be about $1.896.20. If $15,000 of closing costs are added in the payment could become about $1,991.01. You can check the numbers with our online calculator here.

    3. How long do I plan to stay in my home?

    Given the higher upfront costs of refinancing, it’s crucial to consider how long you plan to stay in your current home. With interest rates higher than before, it will take longer to break even on the refinancing costs. If you anticipate moving in the near future, refinancing may not be financially advantageous.

    Suppose your home is now valued at $350,000, and you owe $250,000 on your mortgage. You’re considering a cash-out refinance to borrow against your home equity, increasing your loan amount to $300,000. The closing costs remain estimated at 3% of the new loan amount, or $9,000. The new interest rate for the refinanced mortgage is 6.5%.

    Here’s the hypothetical estimate:

    1. Current Mortgage:
    1. Home Value: $350,000
    2. Loan Amount: $250,000
    3. Equity: $100,000
    1. Refinanced Mortgage (Cash-Out):
    1. New Loan Amount: $300,000
    2. Closing Costs: $9,000
    3. Total Loan: $309,000
    4. Interest Rate: 6.5%
    5. Monthly Payment: Approximately $1,950

    In this scenario, the monthly payment for the refinanced mortgage could be approximately $828 higher than your current payment.

    Now, let’s calculate the potential break-even point:

    • Difference in Monthly Payments: $1,950 (Refinanced) – $1,122 (Current) = $828
    • Closing Costs: $9,000
    • Months to Break Even: $9,000 (Closing Costs) ÷ $828 (Monthly Increase) ≈ 11 months

    In this case, it would take approximately 11 months to possibly recoup the closing costs through the increase in the loan amount from the cash-out refinance.

    Of course these are hypothetical numbers as always, consider your long-term financial goals and housing plans carefully before proceeding. Contact an Embrace loan officer for your actual numbers to better determine if a cash-out refinance makes sense for you.

    4. Are my finances in good shape?

    In a market with higher interest rates, lenders are more stringent in their lending criteria. Excellent credit scores, minimal debt, and substantial savings are even more critical factors in securing favorable refinance terms. If your financial situation has improved since you took out your original loan, you may still qualify for competitive rates despite the market changes.

    5. What are my other financial goals?

    Lastly, before you decide to refinance, it’s also important to consider your other financial goals. Sometimes putting the money that refinancing would cost towards other expenses makes more sense. For example, if you are working on paying down high-interest debt, it likely a good idea to continue working on paying off your debts before putting the money out to refinance.

    Ultimately, given the current market conditions, it’s essential to approach refinancing with careful consideration and realistic expectations. While interest rates have risen and home prices are at record levels, exploring your options and understanding the implications can help you make the best decision for your financial future.

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