Why refinance your mortgage if rates are going up?

The real estate business has been booming during the last five years for a number of reasons, but the primary one is that interest rates have been astonishing low, even when compared to rates 30 or 40 years ago. The availability of cheap cash has led many, if not most, Americans to either buy a home or refinance one. People who had mortgages at seven, eight or even nine percent were able to refinance at interest rates as low as five percent during the past three years. It was a great time for anyone interested in buying, selling, or owning a home.

But during the last year or so, interest rates have been steadily climbing. They are still low by historical standards, but they are going up. Does this mean that you shouldn’t refinance your home loan now?

Not necessarily. There are still some circumstances where it might be very much to your benefit to refinance and other times when it may make no sense at all. It all depends on your individual situation. Below, we will have a brief look at some of those reasons why it may make sense for you.

• Combining two loans into one. Many homeowners take out two loans, or what is known as an 80/20 loan, in order to avoid paying Private Mortgage Insurance, or PMI. PMI is required on loans where the owner’s equity in the home is less than 20%. Some buyers get around that buy taking out two loans - one for 80% of the loan and another for the remaining 20%. With rates on both loans rising, it may make sense now to consolidate them both into a single loan.
• Pay off a home equity loan or line of credit. While these forms of borrowing are much cheaper than credit card loans, they do tend to run higher than traditional mortgages. With interest rates rising, it may be cheaper to pay off that home equity loan and deal with one loan at a lower rate.
• Remodeling. The classic, popular use of a home equity loan can also be accomplished by refinancing with a cash-out mortgage, where the buyer refinances for more than the amount currently owned and takes the difference out in cash. If used for an addition or remodeling project for the home, the result can be added equity, making the house worth more down the road when you want to sell it. This is generally the best use of home equity or refinancing money, as the cash goes right back to improving the property itself, rather than being spent on a vacation or sailboat.

There are numerous other situations where it may be advantageous to refinance a home loan or mortgage even though interest rates are rising. If you aren’t sure if it’s the right thing for you to do, you might consider consulting with a tax advisor.