Understanding Mortgage Refinancing and Home Equity Options in 2023
As we navigate through 2023, the landscape of mortgage refinancing has shifted significantly. Homeowners who once found refinancing a viable option to tap into their home equity are now facing a different reality. With current mortgage rates averaging around 6.75%, refinancing for a larger mortgage is no longer a practical choice for most homeowners. This blog will explore the current state of mortgage refinancing, the potential of home equity loans, and how O1ne Mortgage can assist you in making the best financial decisions for your home.
The Decline of Mortgage Refinancing
In the 2010s, cash-out refinancing was a popular method for homeowners to access their home equity. The average rates for 30-year fixed mortgages declined steadily throughout the decade, allowing homeowners to refinance multiple times. By 2018, cash-out refinances had become more common than traditional rate-and-term refinances, according to data from Freddie Mac.
However, the situation has changed dramatically. With mortgage rates now averaging around 6.75%, refinancing a mortgage for a larger one is not a viable option for most homeowners. Many borrowers are currently paying much lower rates than the national average, making refinancing an unattractive option even if it results in extra cash once closed.
When Might Homeowners Consider Refinancing?
In the past, the rule of thumb for mortgage refinancing was that it made sense when the new loan’s rate was at least 1 percentage point lower than the current mortgage rate. Even then, homeowners had to consider closing costs and the possibility of resetting the clock on another 30-year mortgage.
Today, mortgage industry experts are cautious about predicting where rates are headed. Most agree that we are likely to remain at the 6% to 7% levels for the foreseeable future. This means that refinancing is not a beneficial option for most homeowners, especially those with mortgage rates of 4% or lower.
Exploring Home Equity Options
While cash-out refinancing may not be feasible, homeowners can still leverage their home equity through home equity loans or home equity lines of credit (HELOCs). Even if these options come with higher interest rates than a mortgage refinance, they can still result in lower overall interest payments. This is particularly beneficial for homeowners with significant equity on a low-rate mortgage.
According to Black Knight, U.S. homeowners have close to $16 trillion in home equity, with more than $10 trillion considered tappable. Tappable equity refers to the percentage of a home’s value that can be borrowed against, either through a home equity loan or a HELOC, alongside an existing mortgage.
The Hesitation Around Home Equity Loans and HELOCs
Despite the abundance of tappable equity, home equity loans and HELOCs remain underutilized. Homeowners may be hesitant because these loans use the home as collateral, and failure to repay could result in foreclosure. Additionally, banks and lenders are cautious about offering these loans, as they remain on the banks’ books and are not easily sold to mortgage guarantors like Freddie Mac and Fannie Mae.
However, data from Experian shows that HELOCs are slowly gaining popularity after years of decline. There are several good reasons for homeowners to consider using their equity, such as competitive rates compared to personal loans and the tax advantages of using home equity loans for home improvements.
Benefits of Home Equity Loans and HELOCs
Home equity loans and HELOCs offer several advantages for managing household finances. They typically have lower APRs compared to most variable-rate credit cards, making them a popular choice for debt consolidation. Additionally, home equity loans used for home improvements can be tax-advantaged.
While a homeowner’s credit score and debt-to-income ratio can influence a lender’s decision, significant equity can make lenders more lenient. To improve your chances of securing a HELOC, it’s essential to maintain a healthy debt-to-income ratio, keep current loan payments on track, and ensure you have as much equity as you estimate.
Conclusion
In today’s financial climate, traditional mortgage refinancing may not be the best option for most homeowners. However, home equity loans and HELOCs present viable alternatives for tapping into your home’s value. At O1ne Mortgage, we are committed to helping you navigate these options and make informed decisions that benefit your financial future.
If you have any questions or need assistance with mortgage services, don’t hesitate to call us at 213-732-3074. Our team of experts is here to provide you with the best solutions tailored to your needs.
Remember, understanding your options and making informed decisions can significantly impact your financial well-being. Let O1ne Mortgage be your trusted partner in this journey.
