When the Federal Reserve raised interest rates in December, did it signal an end to the refinancing party homeowners have enjoyed over the past few years?
Not at all. There are several reasons you should still consider refinancing your home after the Fed rate hike.
Four Reasons to Refinance After the Fed Rate Hike
Why should you still consider mortgage refinancing after the Fed raised interest rates? Here are four reasons:
Mortgage rates did not immediately rise in response
There are important differences between short-term interest rates, like the Fed funds rate, and long-term rates, like mortgage rates. Sometimes they are influenced by the same factors, and sometimes not. In this case, the Fed rate hike prompted more or less a shrug from the mortgage industry. In the week following the Fed's action, the average 30-year mortgage rate actually declined slightly, falling by 1 basis point to 3.96 percent.
Mortgage rates are 3 percent below their 30-year average
Over the past 30 years, mortgage rates have averaged 7.02 percent. This means that interest rates as of the end of 2015 were about 3 percent lower than that long-term average. So, for many people with an existing 30-year mortgage – especially a fairly old one – their rate could be significantly higher than current rates. In contrast, the recent Fed rate hike was just 25 basis points. It is likely that this is just the first in a series of incremental rate hikes by the Fed, but even if further rate hikes are to come, and assuming mortgage rates start to react to them, mortgage rates still have plenty of room to move before they approach the norm of the past 30 years.
Not all lenders will take the same action
If mortgage rates do start to rise, it is important for consumers to remember that lenders do not all move in unison. Some will be quick to raise rates to protect themselves, while others will hold out for as long as possible to try to build market share. This means that a rising rate environment is one in which it is especially important to shop actively for refinance rates, because the disparity of rates offered by different lenders is likely to widen.
There are reasons for refinancing besides low interest rates
Finally, a rise in interest rates does not mean homeowners should forget about refinancing, simply because lowering your interest rate is just one of many reasons for refinancing. Depending on what your goals are, restructuring your loan by refinancing can help you stabilize your interest rate, lower your long-term interest expense, or make your monthly payments more affordable. Certainly, low mortgage rates help the numbers work for all these refinancing strategies, but there does not have to be a clear rate advantage in order for these other goals to be worthwhile.
Much of the news coverage of the Fed rate hike used mortgage rates as an example of something that could get more expensive as a result of that increase, but don't let that lead you to believe it has already happened. Mortgage rates still present an attractive refinancing opportunity for many homeowners, and good reasons to refinance will remain even after rates do start to creep up.