Can You Refinance a Fixed Rate Mortgage?

The mortgage industry is volatile at almost any time, whether rates are increasing or falling. When rates are lower, homeowners are more likely to consider refinancing their mortgage loan to take advantage of lower payments. Consumers may be more attracted to adjustable-rate products when the rates rise. CNBC reported that refinancing applications in February 2023 were 76 percent lower than in the same week in 2022.¹

As the Federal Reserve addresses inflation by increasing the federal funds’ interest rate, mortgage rates follow, reducing demand. Purchase applications also dropped, although realtors are reporting some signs of increased activity.²

The interest rate you get makes a significant difference in the monthly payment. For example, let's look at a comparison assuming a home price of $400,000 and a ten percent down payment (loan amount of $360,000):

For illustrative purposes only, actual terms may be more or less favorable than shown. Using mortgagecalculator.org, assumes 30 year note, including private mortgage insurance (PMI) due to lower down payment and nominal property taxes and insurance payments.

When does refinancing make sense?

Refinancing your fixed-rate mortgage makes sense for homeowners in some circumstances. For example, traditional wisdom used to say that the interest rate should be at least two percentage points lower than your current rate to be worthwhile. That may have been accurate back in the 1980s when mortgage rates hit an all-time high of over 18 percent.³ Mortgage rates were much higher, but house prices were so much lower that a significant decrease in the rate was necessary to move the needle on the total payment. Today, the threshold is much lower for homeowners to find the refinance process and the cost worthwhile.

Lower rates improve the borrower's buying power, and a lower rate can make refinancing profitable by allowing the owner to “cash out” some of the equity they have accrued in their home. Cash-out refinance loans are considered one of the significant contributors to the 2008 global financial crisis,⁴ but the share of cash-out refinances is currently lower than during previous booms.

Cash-out versus payment reduction.

Many homeowners view refinancing as a means of reducing their overall payment when interest rates drop, while others want to access cash for other purposes. If your home value has increased by $100,000, that’s a tempting target for using to improve your finances or bankroll an investment property purchase. Homeowners and investors may decide to refinance for cash out to use the equity as a down payment for their first investment property, to pay off other obligations, or to improve their existing property.

When you consider a refinance, keep in mind that even if the interest rate is lower, you may end up paying origination fees, appraisal costs, and other closing expenses. In addition, if you have already made years of payments on your existing mortgage, it may not be worth starting over for another 30 years. Of course, if you are refinancing an investment property, those closing costs are added to your basis and can be included in your depreciation schedule.

^1,2 CNBC.com, “Mortgage demand drops as interest rates bounce higher," February 15, 2023, https://www.cnbc.com/2023/02/15/mortgage-demand-drops-interest-rates-jump.html

³ cnn.com, “Think mortgage rates are high now? Homebuyers in the 1980s were paying 19%,” Anna Bahney, CNN Business, September 29, 2022. https://www.cnn.com/2022/09/29/homes/1980s-mortgage-rates-home-affordability/index.html

⁴ Urban.org, Cash-out refinancing is on the rise again. Here’s why we aren’t worried,” Urban Institute, October 29, 2018, https://www.urban.org/urban-wire/cash-out-refinancing-rise-again-heres-why-we-arent-worried