Money Management

Refinancing a mortgage could still make sense, but only in limited circumstances. 

In the summer of 2020, when mortgage rates plunged to record lows, homeowners rushed to refinance, to the point where mortgage lenders found themselves pretty overwhelmed. But we’re in a very different situation today.

Mortgage refinances are down 87% compared to where demand sat a year ago, according to the Mortgage Bankers Association. And while some homeowners jumped on the chance to refinance in December of 2022, when mortgage rates dipped slightly, rates have since come back up. That means that once again, many homeowners won’t actually reap savings in the course of refinancing a mortgage.

But while it’s generally not a great time to refinance a mortgage, in limited circumstances, it could make sense. Here are two scenarios where you may want to consider refinancing after all.

1. When you can still come away with savings

It may be that when you signed your original mortgage, your credit score wasn’t in good shape and you barely qualified for that loan in the first place. If your credit score is now stellar, then you might be able to snag a lower interest rate on a home loan than what you’re paying already. So if that’s the case, a refinance could make financial sense.

That said, there are closing costs associated with refinancing, so you’ll need to make sure you’re reaping enough savings for those fees to be worth paying. As a general rule, you should aim to come away with an interest rate on a new mortgage that’s about 1% lower than your current rate at the very least. If your current mortgage rate is 7.25% and you’re approved to refinance at 6.85%, that’s probably not worth doing.

2. When you want to tap your home equity

Many people who refinance borrow the same amount they owe on their existing mortgages. But there’s another option you can look at — a cash-out refinance.

With a cash-out refinance, you borrow more than your remaining mortgage balance, and you get a check for the difference you can use as you please. So as an example, say you owe $200,000 on your mortgage but your home is worth $500,000 and you need $40,000 to finish your basement. That means you have plenty of equity to play around with. You could do a cash-out refinance for $240,000, use the first $200,000 to pay off your existing mortgage, and take the $40,000 for renovation purposes.

The upside of a cash-out refinance is that even though mortgage rates are up right now, it could be a cheaper way to borrow than a personal loan or even a home equity loan. And also, your loan should be easy to manage, because you’ll be making only one monthly payment (as opposed to, for example, making a mortgage payment every month and also a separate personal loan payment).

It’s fair to say that most homeowners today won’t benefit from refinancing. But that doesn’t mean there aren’t exceptions. So ultimately, your best bet is to consider your personal circumstances and run the numbers before writing off the idea of refinancing.

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Sometimes, more spending power can work to your benefit. 

The holiday season is when a lot of people tend to ramp up their shopping, and understandably so. If you wanted more purchasing power during the holidays this past year, you may have made the decision to open a new credit card.

But what if you’re back to your regular spending routine now, and you don’t see yourself using that credit card for the foreseeable future? You may be inclined to close that account. But doing so could have a negative effect on your credit score.

Closing a credit card could hurt you

The length of your credit history plays a role in determining your credit score. And so closing a credit card you’ve had open for a long time could result in a credit score hit.

In this situation, though, you’re not talking about closing a long-standing account. Rather, you’re talking about closing a credit card you opened very recently. And canceling an account that’s only been open for a month or so shouldn’t be a big deal from a length of credit history perspective.

But that doesn’t mean closing your credit card is the right call. That credit card could still be helping your credit score, even if you don’t realize it.

Another big factor that goes into calculating a credit score is utilization, or the amount of available credit you’re using at once. Generally speaking, a credit utilization ratio of 30% or less will do good things for your credit score. But once your utilization ratio exceeds the 30% mark, your credit score has the potential to take a hit.

So, let’s say you opened a new credit card during the holidays with a $3,000 spending limit, and prior to that, your spending limit across your older credit cards was $10,000. It may be that you’re sitting on a $3,500 credit card balance due to carrying older debts forward and adding to your total during the holidays.

If you’re looking at a credit limit of $13,000 across your various credit cards, a balance of $3,500 puts you at about 27% utilization. That’s below the threshold where you start to creep into the danger zone.

But watch what happens if you close that newly opened credit card. Suddenly, you’re looking at a credit utilization ratio of 35% due to your total limit shrinking, which is really not where you want to be.

That’s why hanging onto a credit card you don’t think you’ll use often could make sense. If you close it, you might cause yourself credit score damage for no good reason.

Find a safe place for a credit card you’ll rarely use

You may carry your credit cards around with you in your wallet so they’re available to swipe at any time. If you don’t see yourself using your recently opened credit card anytime soon, don’t keep it in your wallet. Rather, keep it someplace secure. If you lose your wallet, you’ll have one less card to worry about.

If you have a safe at home, stick your credit card in there. Otherwise, find a secure location that you’ll remember to check in case a need to use that credit card does arise.

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Keep these important points in mind as you get ready to file your return. 

Most of us associate the month of April with filing taxes, since that’s when they’re due. But actually, January is a good time to start thinking about your tax return.

For one thing, you can actually submit it at the end of the month if you’re ready by then. And doing so could mean having your refund hit your bank account sooner.

But this year’s tax season may look a little different than 2022’s. Here’s what you need to know.

1. Your refund might be smaller

Most people who file a tax return end up being owed money by the IRS. And that may continue to be the case this year. But Mark Steber, Chief Tax Information Officer at Jackson Hewitt, warns that this year, a lot of people may be in for what he calls a “refund surprise.”

“There were many tax changes in 2021 that resulted in refunds in 2022,” explains Steber. “This year, we may not see refunds as high.”

The changes Steber is referring to came from the American Rescue Plan, a massive stimulus bill that was signed into law in March of 2021. That stimulus package gave the Child Tax Credit a major boost, and because of that, among other factors, a lot of people were owed a higher tax refund in 2022.

But during the 2022 tax year, there were no federal stimulus packages, and the Child Tax Credit reverted to its former rules. So it won’t be surprising to see taxpayers in line for smaller refunds this season.

2. You might need to hire a professional for filing help

Not only was 2022 a year without federal stimulus aid, but it was also a year during which inflation soared. That may have prompted a lot of people to make different financial moves that could affect their taxes.

Some people may have dipped into their retirement savings. Others may have sold off stocks to get access to money, or taken on side gigs to boost their income.

If you made any such financial moves or changes, it could pay to hire a tax professional to help you with your 2022 return — even if you’ve historically been able to handle filing your taxes on your own. This way, you can make sure you’re claiming the right amount of income and are taking the right deductions.

3. It pays to file your taxes electronically

We’re starting off 2023 with the IRS sitting on a huge backlog of tax returns from 2022. That means that anyone who submits a paper return this season risks seeing their refund delayed.

If you want to avoid that, file your taxes electronically. The IRS typically issues refunds for electronically filed returns within three weeks. Also, filing electronically could reduce your chances of making a mistake on your tax return. And error-free returns are less likely to be subject to refund-related holdups.

This year’s tax season could look very different from 2022’s. Don’t be surprised if you end up with a smaller refund and need filing assistance. And also, do yourself a favor by filing your taxes electronically, and by getting started on them sooner rather than later.

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There’s one silver lining to enjoy. 

In case you haven’t noticed, inflation has been wreaking havoc on consumers for months on end. Since the latter part of 2021, it’s been more expensive to buy everything from food to apparel to household goods.

The Federal Reserve has been on a mission to combat inflation. And to that end, it implemented several aggressive interest rate hikes in 2022.

Now, let’s get one thing straight. The Fed doesn’t directly set consumer interest rates. The rate you’re charged to take out a mortgage, for example, isn’t set by the Fed. Rather, the Fed oversees the federal funds rate, which is what banks charge each other for short-term borrowing purposes.

But when the federal funds rate rises, it tends to drive up consumer interest rates as well. So right now, it costs more money than it did a year ago to finance a car or take out a personal loan.

Clearly, higher interest rates are not a good thing for borrowers. But the Fed’s rate hikes aren’t all bad. In fact, they’ve led to one very positive outcome for people with money in savings.

Savings rates are finally something to celebrate

For years, savings account and CD rates were so low that people with money in the bank were getting virtually no benefit from it (other than having a safe place to stash their cash). But over the past few months, banks have been paying much more generously.

These days, you can easily find a savings account paying interest in the 3% to 4% range, especially if you open a high-yield savings account at an online bank. And CDs are largely paying 4% or higher, too.

That’s a big improvement from about a year ago, when you couldn’t even get a 1% return on your money. And it also means that a lot of people have a prime opportunity to earn more of a return on their cash without taking on loads of risk.

The volatility in the stock market over the past year is a good reminder that it’s not a good idea to invest money you might need anytime soon. Instead of investing, though, you can put your money into a savings account or CD and enjoy a nice return without having to worry about losing out on principal.

More rate hikes could be on the way

Although inflation has cooled a bit since peaking in mid-2022, it’s still well above normal levels. As such, the Fed isn’t done moving forward with interest rate hikes, and consumers should expect to see more of those in 2023.

Granted, the Fed might implement lower rate hikes than it did in 2022. But either way, consumers should expect the cost of borrowing to continue to rise. And while that’s not a great thing, the flipside is that savings accounts and CDs should be a more lucrative option for the foreseeable future. In fact, today’s higher savings account and CD rates might inspire more people to sock money away in the bank, thereby lending to more financial stability.

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Investing isn’t about getting rich overnight. It’s about investing in assets you believe in and holding on for the long haul. 

Something occurred to me last night as I watched a documentary about Wall Street. The film touched on the stock market crash of 1973-1974. In the documentary, people ran around like their hair was on fire, absolutely panicked. My first thought was, “Wow. That didn’t touch me at all.” Sure, I was a young child, but my parents were investors, and it seems like I would have heard something about the biggest drop in the stock market since the Great Depression.

And because I can’t just let go of a thought, I made a list of all the huge drops since that time. There was the Black Monday crash of 1987, the dot.com bubble fiasco of 1999, the Great Recession of 2008, and the short but dramatic drop in the market during the COVID-19 pandemic.

The point is this: The market will experience drops — sometimes huge drops. It’s happened time and again since the New York Stock Exchange opened its doors in 1792. But like an airplane hitting turbulence, every time it’s dropped, it’s bounced back up.

Sure, we’re dealing with the aftermath of the pandemic and hoping inflation will find its way out the door, but now is not the time to panic. Now is the time to soberly consider the smart thing to do in the upcoming 12 months.

If you’re a bargain hunter

According to the raw numbers, we’ve crawled out of a bear market. So why doesn’t it feel like it? Because, according to Forbes, the market is still down nearly 20% over the past year. While that’s not as bad as it was, it still doesn’t feel great.

You may have heard this a thousand times, but there’s no better time to fill your portfolio with low-priced assets than when others are too scared to remain in the market. Based on the historical performance of the stock market, bear markets are followed by longer, stronger bull markets. And as those assets increase in value, you want them in your pocket.

For a bit of inspiration, consider this fact: Stocks lose an average of 36% during a bear market. However, during a bull market, stocks gain an average of 114%. There have been far more bull markets than bear markets, further increasing your odds of success.

The same rules that apply during a bull market apply today.

Buy into assets you know and fully understand.Remain diversified between various asset classes so a dip in one sector can’t pull your entire portfolio down.Don’t buy anything you don’t plan to hold for at least 10 years.

Past returns are no guarantee of future results, but history shows that those who stick with it are rewarded.

If you’re nervous

While Wall Street strategists appear pessimistic, groups like Goldman Sachs, JPMorgan Chase & Co, and UBS Asset Management believe the economy will defy expectations. It’s these conflicting views that make investment decisions so tough for many of us.

If you’re losing sleep over the thought of market losses, it’s okay to take it easy on yourself. For you, 2023 may be the year to invest in lower-risk assets. Here’s a sample of low- to no-risk investments:

Certificate of deposit (CD)Money market fundsTreasury inflation-protected securities (TIPS)U.S. savings bondsAnnuities

Regardless of whether the market is up or down, the world keeps spinning. The wrong move is to be paralyzed by indecision and do nothing in 2023. Whether you trust the market to rebound or decide to accept a lower return on low-risk investments, it’s important to remain in the game.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Dana George has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group and JPMorgan Chase. The Motley Fool has a disclosure policy.

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Doing these things can help you start the new year off right. 

Vowing to improve your finances is one of the most common New Year’s resolutions, but it’s not always easy to know where to begin. Fortunately, it doesn’t always require huge changes, like saving a quarter of each paycheck.

There’s a lot of simple things you can do that will continue to reward you all year long. Here are three finance-improving tasks that will only take about five minutes.

1. Update your life insurance beneficiaries

Those who have life insurance should schedule an annual review, both to make sure they have adequate coverage and to update their beneficiaries. Beneficiaries are those who receive the death benefit after the policyholder passes, and outdated beneficiaries could cause all sorts of problems for family members left behind.

A person who’s recently divorced or been widowed may need to choose new beneficiaries and those who have welcomed another child into their families may want to update their list of beneficiaries to include the new addition.

Policyholders who aren’t sure how to make this change should reach out to their life insurer to learn more. If they have access to an online account, they may be able to make the change themselves. Or they may have to contact an agent for assistance.

2. Review your emergency fund

With the high inflation we faced in 2022, it’s possible your emergency fund isn’t adequate anymore even if you never spent any of it during the last year. This fund is supposed to contain at least three months of living expenses to help you cover unexpected costs that arise. But now that most living expenses have gone up, you may need to bump up your emergency savings to avoid coming up short in a crisis.

You might also need a larger emergency fund if your household finances have changed significantly. Getting a new job or welcoming a new household member could increase the amount you need to save in your emergency fund. Conversely, if family members move out or your average monthly expenses have decreased, you may be able to get by with saving less.

3. Cancel unused subscriptions

Canceling subscriptions you’re no longer using is a simple way to add a little extra money to your bank account each month. It’s pretty easy for most people to review their monthly subscriptions because they receive bills for them frequently. But not all subscriptions bill you that often. Some may charge you every few months or annually, and these can be harder to track down.

It’s a good idea to look back through all of your bank and credit card statements for 2022 to make sure you haven’t forgotten about any subscriptions you’re paying for. These could be things like physical memberships to a gym or subscriptions to online services, like streaming platforms.

Taking the three steps above is far from a comprehensive financial review, but it can give you a good start. If you have a retirement account or a monthly budget you adhere to, continue reviewing those things as well to make sure you’re on track for your long-term goals. It doesn’t have to take a ton of time and it can help you identify small problems before they turn into big ones.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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