5 ways to refinance when interest rates rise

Posted by  on Jan 23, 2017

After a long period of decline, mortgage rates began to increase slightly in 2015. Because recent years have seen some of the lowest mortgage rates on record, it is possible that we are on the verge of a sustained period of rising rates. While a rise in mortgage rates is not ideal for the home refinance market, it calls for a shift in tactics rather than completely giving up on the idea of refinancing.

A future home refinance certainly won't be as easy as when rates were falling, but with a shift in goals and tactics there are still ways refinancing can make sense in a rising interest rate environment.

5 ways to refinance when rates rise

Here are five ways you can think about refinancing when rates are rising:

  1. Shift to a shorter loan. Fifteen-year mortgage rates have been running about 80 basis points below 30-year rates, so even if rates overall have moved a bit higher, there might still be room to lower your interest rate by shifting to a shorter loan. Also, a shift to a shorter loan should save you interest costs in the long run because you would be paying interest over fewer years.
  2. Consider variable rates for short time horizons. If you anticipate being able to pay off your mortgage in a few years, consider a shift to an adjustable-rate mortgage (ARM). These offer even lower rates than 15-year loans, and if you choose an ARM with a long initial reset period, you can reduce your exposure to rising rates.
  3. Take advantage of improved credit. The job market has gotten stronger in recent months, and now that you're a few years older perhaps your income and credit rating have improved from when you first got your mortgage. If so, this might help you qualify for a lower mortgage rate, and make refinancing worthwhile even though average rates have started to rise.
  4. Use refinancing for payment management. Lowering your mortgage rate is not the only reason to refinance. If you are having trouble making your monthly payments, refinancing to a longer repayment period can help make those payments more manageable. Even though this is likely to result in you paying more interest over the life of the loan, it is preferable to risking default. Another option is using cash-out refinancing for debt consolidation, because mortgages are still cheaper than most other sources of debt, such as credit cards.
  5. Do some comparison shopping. When rates are on the move, comparing mortgage quotes from different lenders becomes especially important. Different lenders are going to react to a rising rate environment at different times and to different degrees, so shopping around might make an especially big difference.

Most of all, a rising rate environment calls for decisiveness about home loans. If you see a worthwhile opportunity, act before higher rates eliminate it.


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