Mortgage Rates are Increasing: Can You Still Refinance?

In mid-June, 30-year mortgage rates surged above 4 percent for the first time in seven months. Does that mean the party is over for refinancing?

Not by a long shot. Refinancing rates may be a little higher these days, but there are still several reasons you should look at refinancing your mortgage.

For Many, the Door is Just Opening

Despite historically low mortgage rates in recent years, many homeowners found themselves on the outside looking in when it came to refinancing. At the same time mortgages were getting cheaper, standards for loan approval were getting tougher, and two common problems made those standards difficult to meet: underwater loans and compromised credit standing.

The peak of the housing market came in July of 2006, meaning that people who bought around that time might soon have found their mortgages underwater, with the value of their properties plunging below the balance owed on their loans. Unless they qualified for special programs, this would have prevented these homeowners from refinancing. Only recently, with some recovery in home prices and several years of principal payments, are many of those loans emerging from underwater.

If you bought your home around the peak of the market, remember that back in July of 2006, 30-year mortgage rates were around 6.7 percent. Thus, today's rates of around 4.0 percent are still low enough to make refinancing a great deal if your loan has only just emerged from underwater.

Another obstacle to refinancing during the low mortgage rate era has been that, due to the Great Recession, many Americans suffered financial setbacks that damaged their credit ratings. However, with the economy growing stronger, people's finances are getting healthier while loan standards are getting a little easier. This is another reason the door to refinancing might just now be opening for some homeowners. Again, compared to rates just before the housing crisis, today's refinance rates are still low enough to make walking through that door worthwhile.

Time to Shift from Adjustable to Fixed

Adjustable-rate mortgages have represented a small minority of home loans in recent years, but some homebuyers still opt for them – among other things, because adjustable rates are considerably lower than fixed rates.

By and large, opting for an adjustable-rate mortgage has paid off since the housing crisis, with mortgage rates remaining consistently low for the most part. However, looking at more than 40 years of mortgage history shows that 30-year rates never dropped below 5 percent before 2009. If you think that rates are due to return to more normal levels, this might be a good time to lock in today's relatively low rates with a move from an adjustable-rate to a fixed-rate mortgage.

Look at Refinancing Options if Your Payments are Unmanageable

Refinance rates might not be lower than your current rate, but they shouldn't be much higher at this point either. That means that if you are a few years into a mortgage and are having trouble meeting your monthly payments, one option is to refinance to a fresh 30-year loan and lower your payments by stretching your remaining balance over a longer time.

This is an option you should only pursue if it is the only way of keeping up with your mortgage payments. Any time you lengthen out a loan, you are likely to pay more interest in the long run. Still, if this is the only alternative to falling behind on your payments, it is by far the lesser of two evils.

Go Short to Reduce Interest Expense

15-year mortgage rates are running about 80 basis points lower than 30-year rates. If you have paid your mortgage down to where there is not much longer than 15 years left, you might be able to get a lower interest rate by refinancing to a shorter loan without a shorter repayment period boosting your monthly payments too much.

Shorter loans not only carry lower interest rates, but they also cost you less in the long run because you will be paying interest over fewer years. Shortening your loan might not be practical if it is too drastic a jump, but if you have already paid off several years of a 30-year loan, it might not be too much of a stretch to refinance into a 15-year loan.

Refinancing activity definitely spikes when mortgage rates drop, but it does not stop altogether when they rise. The above are some prominent examples of how refinancing can still help you manage your household finances.

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