Does refinancing make sense when rates rise?

Posted by  on Jul 29, 2013

Signs of an improving economy and a volatile stock market sent mortgage rates approximately 1 percent higher in June 2013 than they were in April 2013. When you compare mortgage rates today with your current mortgage rate, though, and you may find they are a little bit lower. Mortgage experts used to say that refinancing only made sense if you could lower your interest rate by at least 2 percent; but these days many homeowners opt for zero-cost refinancing, paying a slightly higher interest rate so they don't incur any out-of-pocket expenses. In that case, refinancing for even a half-point lower rate may make sense.

Four reasons to refinance now

The decision to refinance must always be made in the context of your financial plan, including other investments and expenses and your projection of how long you plan to stay in your current home. Even when mortgage rates rise, some homeowners can benefit from refinancing in a variety of ways, such as:

1.Switching to a shorter loan term. Mortgage rates on 20, 15 and 10-year mortgage loans are lower than the rates on a 30-year fixed-rate loan; so if you're interested in paying off your loan more quickly, you can use a mortgage calculator to estimate your payments. Your payments will likely be higher than those you're making on your current 30-year fixed rate loan; but not only will your interest rate be lower, you'll also be refinancing a smaller loan balance. For instance, if you've been paying down a $300,000 30-year loan at 5.5 percent for eight years, your monthly payments are $1,703 and your loan balance is $260,514. If you refinance into a 15-year loan at 3.5 percent, your payments will be $1,862, just $159 more.

2.Lowering your monthly payment. If you want to improve your cash flow, you can refinance that same loan into a new 30-year fixed-rate loan at 4.7 percent and your monthly payments will be $1,320, a savings of $383 per month.

3.Locking your ARM into a fixed-rate loan. Many savvy homeowners have been riding mortgage rates down with an adjustable rate mortgage (ARM), but since most mortgage experts believe mortgage rates are unlikely to reach any new lows, you may want to lock in a fixed-rate loan rather than risk higher interest rates when your loan resets in the future.

4.Taking advantage of your stronger credit profile. If you've resisted refinancing because you thought you couldn't qualify or you've had some credit issues in the past, you may want to talk to a lender about your qualifications now. Some mortgage lenders have loosened their credit standards a little bit; but more importantly, your qualifications may have improved. Check your credit score, but also consider that if your income has increased and your home value has increased, these can both improve your ability to refinance.

If you're considering refinancing, talk with a lender and compare a variety of loan options to see which is the best fit for your individual circumstances.

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