Deciding whether or not to refinance your mortgage can be a tricky decision.
On the one hand, you might want to refinance your mortgage as soon as possible in order to shorten the term of your loan, convert to a flat-rate mortgage, borrow additional funds, or remove a cosigner from the loan. On the other hand, timing is everything when it comes to refinancing a mortgage, especially if you’re looking to refinance in order to get a better rate.
Although holding out on refinancing while interest rates are on the rise might sound like the best idea, it could prove to be a rather costly mistake. By the time rates stop increasing, you could end up having missed your chance at locking in the lowest possible rate.
While the choice to refinance your current mortgage is ultimately up to you and your family’s personal situation, here are seven reasons you might want to refinance even while interest rates are on the rise.
You Can Still Lock in a Low Rate
If you are already in the pipeline to refinance when a rate increase hits, your lender will typically honor the rate you locked in at the time of your application’s approval.
Additionally, you can also buy down your rate even more by purchasing points when you refinance. Deciding whether or not to do so requires some careful analysis of your outstanding principal and other factors.
Say Goodbye to Private Mortgage Insurance
Your lender mostly likely will require private mortgage insurance (PMI) if you purchased your home with less than 20 percent of the price as a down payment. This works to protect them in case you default in the future.
The premiums for these policies can be quite high — often a substantial amount of your overall payment, and sometimes even higher. Refinancing while the market is strong could result in the value of your home going up, meaning your equity could be over 20 percent, getting rid of that pesky PMI payment.
[Related: Seven Questions to Ask Yourself Before Refinancing]
Cash Out a Little Equity for Home Improvements
If you’ve owned your home for a while, refinancing can allow you to borrow some of your equity at a very low rate. You can then use those funds for critical home repairs or upgrades that can help further boost the value of your home.
Invest Some Equity in Interest-Bearing Options
When interest rates are low, a certificate of deposit (CD) or similar financial device may not make much sense. After all, getting less than 1 percent interest on an investment isn’t going to impact your finances much.
If you refinance when rates are low, you can take some of the money invested in your home, which isn’t really accruing interest, and put it to work somewhere where it can make you more money.
Save Yourself From the Risks of an Adjustable Rate Mortgage
If your mortgage is an adjustable rate mortgage, your interest rate will continue to increase as the prime interest rate for lenders and banks increases.
Barring another sudden economic downturn, chances are good that interest rates will continue to go up, rather than going back down. Rates have been at historic lows since the housing collapse of 2008, and again recently because of the coronavirus pandemic.
Even with very modest recent increases, the current rate is much better than the rate people may get quoted in another year or two. Don’t risk a skyrocketing payment. Get out of your adjustable rate and into a fixed rate mortgage while rates remain low.
[Related: Seattle’s Current Housing Market]
You Can Actually Benefit From Future Inflation
Inflation has a big impact on how substantial your mortgage payment seems compared to your income.
Currently, inflation rates are relatively low domestically, which means that the Federal Reserve could take their time adjusting the rate. When that happens, the same amount of money will have less purchasing power.
Essentially, locking in a low rate when inflation is low can help you benefit when inflation goes up in the future.
Get Your Ex Off Your Mortgage
When you divorced, there could have been complicating factors that prevented you from carrying the mortgage on your own. If that has since changed, now is a great time to refinance, get a great rate, and take your ex’s name off of your mortgage (and deed).
[Related: How to Maintain Your Credit Score While Shopping for Mortgage Rates]
Whatever your reason for refinancing your mortgage, you need to weigh risk and reward when deciding when to start the process. While interest rates may be rising, the aforementioned reasons might sway you to stop delaying and start refinancing.
If you have any questions or concerns about the process of refinancing your mortgage, Seattle Mortgage Planners is here to help. Give us a call, or contact us using our online form today and let’s get started.