Do Higher Rates Mean You've Missed the Refinance Boat? Not Necessarily

Does it make sense to refinance a mortgage even though rates are rising? Now's a good time to ask that question, because at the time of writing, mortgage rates have just jumped. By the time you read this, they may be even higher or might have fallen back to new lows. Either way, it's pretty much inevitable they'll head upward again sometime soon, so it's worth thinking through the connection between rates and refinancing.

Good's Good When You Can't Get Best

In an ideal world, you'd always buy stocks, bonds, gold, real estate and all other investments when their prices are at their lowest and are just about to soar – and sell when those prices reach a peak and are about to plummet. Some people earn huge salaries based on their track records for picking such moments, though many believe those investment managers' success is down to luck as much as judgment. In reality, nobody can tell for sure when a trend is going to turn, though having as much information as possible might give you a small edge.

The same applies to mortgage and refinance rates. It would have been great to have refinanced in the last two months of 2013, when mortgage rates reached their all-time low (based on monthly averages in Freddie Mac's archives) of 3.35 percent. But very few, if any, of the people who did so then realized that would turn out to be a record. They thought it was a great deal and seized it, but most at the time probably thought rates would follow the then downward trend and go even lower.

The point is, trying to fine tune the timing of major financial decisions around market trends rarely pays. Of course, you want to ride those to your advantage, but hitting the sweet spot when a trend bottoms out before rising is almost always down to sheer dumb luck. You're likely to do better by grabbing a good deal, even one at the start of an upward movement, rather than waiting for the best. And sometimes that means you should refinance a mortgage even though rates are rising.

Refinancing as Math

The good news is, refinancing is mostly a matter of math, so you can recognize whether it makes sense for you from a mile away. Better yet, you don't even have to be any good at math to work out whether you should go ahead. Instead, let the LendingTree online mortgage refinance calculator and refinance payment calculator do the heavy lifting.

Of course, there's a bit more to it than pure math. You need to take closing costs into account, though you can usually roll those up into the new loan, and also consider how long you're going to stay in your home. For a fuller discussion of those and other factors, read Should I Refinance My Home?

Reasons to Refinance

As industry expert and blogger the Mortgage Professor points out, there are four main reasons homeowners refinance:

  1. To liberate some equity – A cash-out refinance sees you walk away with a lump sum
  2. To lower monthly payments – Refinance to a lower rate and your payments should fall
  3. To avoid higher monthly payments in the future – If you have an adjustable-rate mortgage (ARM), your payments will almost certainly rise one day, possibly significantly, and refinancing can moderate the impact of that
  4. To reduce the total amount of interest you pay over the lifetime of the loan – Refinance a 30-year mortgage to 15 years and you're going to pay less in the long run

Some of these are more sensitive to prevailing refinance rates than others. Certainly, if your aim is to lower your monthly payments, you'll want the lowest rate possible because of the obvious and direct link between the two. However, remember that every month you're paying more than you need involves a cost, so waiting around for a slightly lower rate can be a false economy – especially if that lower rate never comes. If, on the other hand, you want to refinance because you need an urgent injection of cash (perhaps to stave off financial disaster, or to pay for something that means more to you than mere money, such as your daughter's or son's wedding or your parent's health co-payments), you may worry less about the rate you get.

Of course, you always want to pay the least possible, but fixating on rate trends can be counterproductive. What you really should do, when you finally do decide to go ahead, is compare multiple quotes from different lenders.

Don't Get Hung Up on the Unknowable

The person writing about this spends an inordinate amount of time studying and thinking about mortgage rate trends because he contributes the daily mortgage rate lock recommendation to the LendingTree site. And the more he learns, the less certain he becomes about what lies ahead. He has highly respected colleagues who are convinced mortgage rates have further to fall. However, probably most experts believe the longer term trend is going to be upward. In their latest (at the time of writing) forecasts, economists at Freddie Mac and Fannie Mae predict gentle rises between now and the end of 2017. Those at the Mortgage Bankers Association expected faster increases in their September 2016 Mortgage Finance Forecast: They reckon the average for a 30-year fixed-rate mortgage will be 4.4 percent by the end of next year.

If they turn out to be right, and such experts often aren't, the answer to our opening question is a no-brainer: Yes, it can make sense to refinance a mortgage even though rates are rising.

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