Do you want to refinance your home but are worried about interest rates going up? This could be a valid concern in 2018 as rates are probably going to rise as the economy gathers steam. But don’t worry, you still have time to refinance. If you follow our tips below, you will have a better chance of refinancing effectively in a generally rising rate environment.
#1 Stop Waiting for Home Refinancing Rates to Fall
As of early 2018, rates are still in the range of 4%. Many people are surprised about this in the mortgage industry. Housing prices are going up and unemployment is low. This is usually when mortgage rates start to go up. There is no question that as of right now, rates are too low for market conditions. But we would not expect this to continue; the Fed is promising rate hikes and the economic outlook for 2018 is fairly strong.
Some estimates we have seen have home mortgage refinance rates in the mid-4s this year, so you probably should make your move soon.
#2 Be Ready in case Interest Rates Do Fall
It is wise to get your refinance application turned in soon. This is not just because rates may rise. It is common for there to be a backlog of refi applications if rates start to go down. If you have to get in the back of the line with your application, you could miss the drop in rates. It doesn’t hurt to follow the financial news so you aware of the trend for the current mortgage refinance rates.
You are not required to lock in your interest rate when you do your refinance. You can watch the market and decide when is the right time to lock.
But if you are not quite ready to submit your application, make sure you keep your credit score high and have all of your financial documents ready to go to submit an application quickly. These documents include your last two tax returns, pay stubs and bank statements.
#3 Make an Effort to Establish Good Credit Scores
It may be difficult to get a refinance done fast if your FICO score is too low. Your credit score will play a major role in the interest rate you can get with your refinance. Just because rates are under 4% does not mean you will be able to get that rate.
The good news is that you can quickly increase your credit score by 50 points or more by doing things such as paying off credit card debt. Also, pay your bills on time and try to keep your credit card debt no more than 1/3 of your limits.
#4 Use Increasing Home Prices to Your Benefit
Home values are going up, even though interest rates at the moment are not showing much movement. Now could be a good time to use your home’s equity with a cash refinance loan. However, you should use caution with how your equity is spent. The best thing to do with equity is to use it to invest in things that will pay you back. Making home improvements is the most common use of home equity with a cash out refinance. Some home improvements will pay you back when you sell the home.
#5 Don’t Rule Out Home Refinancing with a Variable Interest Rate
A smart move to consider is refinancing into an adjustable rate mortgage when rates are rising. The rates for an ARM are lower than those for fixed rate mortgages. An ARM can really make sense if you are planning to sell your home within a few years before the rate can possibly reset at a higher level.
#6 Consider Refinancing with a 15-Year Term
Refinancing your mortgage into a shorter-term loan can give you a lower rate than a 30-year mortgage. The shorter term of the new loan also means you will pay less in interest over the loan’s life. However, note that you will pay a higher payment with a shorter-term loan. If you have the cash-flow to make the higher payment and a committed vision, we recommend considering a 15-Year mortgage refinance.
#7 Paying for Points on Your Home Loan May Be Wise
Before your new mortgage closes, you can pay points on the loan so that you can lower the interest rate throughout the life of the mortgage. If paying points up front can substantially lower the rate in a rising environment, this can be a smart move.
One point paid equals one percent of the amount of the loan. If rates are volatile, you may have to pay more for your points. Still it can be worth it if rates are on the way up.
#8 Refinance Out of an ARM or HELOC
If you are in a rising rate environment and have a HELOC credit line or an ARM, you could be facing a payment shock with higher rates. Refinancing into a fixed rate loan can lock you into a higher but steady rate that you know will not go up.
People with a home equity line of credit really need to be on the look out for rising interest rates. When the five or 10-year draw period ends on the loan, you have to start paying back both interest and principal. If rates go up on top of it, your payment really could skyrocket. Try contacting the bank and see if you can move into a fixed rate credit line, or possibly converting it to a home equity loan with a fixed rate.
Takeaways on Refinancing When Mortgage Rates Are Rising
If interest rates are going up or are about to, you should consider the above tips to save yourself from paying a lot more in interest each month.
References: 8 Tips for Refinancing as Mortgage Rates Rise. (2017). Retrieved from https://www.marketwatch.com/story/8-tips-for-refinancing-as-mortgage-rates-rise-2017-02-22