Rising Rates May Spur Refinancing Surge

Conventional wisdom tells us that when interest rates fall, people tend to refinance in order to capture them. But refinancing has also historically spiked when rates turn upward, because people don't want to miss the chance to lock in attractive rates that may soon slip away.

The summer of 2008 may see a resurgence of "refi fever" as people rush to capitalize on rock-bottom interest rates while the opportunity still exists. Back at the end of 2007, rates were somewhat volatile, and the number of loan and refinance applications rose. The same happened at the beginning of this year, because the Fed was chopping rates each month. Now, the central banking committee is primarily focused on taming runaway inflation. The best way to do that is to tighten credit, and the fastest way to do that is to raise the discount rate and the Fed funds rate.

Strengthening dollar means higher mortgage rates

With rates at their lowest level since the last recession, the Fed really has nowhere else to move but higher, and Fed Chairman Ben Bernanke has already insinuated that rates aren't going to go any lower in the foreseeable future. The pressure is on to strengthen the dollar and bring down consumer prices. The Fed will probably keep rates where they are for the time being, just to enhance market stability and wring out the last drops of benefit for ailing financial institutions that were the real winners during the last round of rate cuts. Ordinary consumers haven't enjoyed those rates so much, due to more stringent loan application guidelines and dropping home prices that erase equity and make it harder to qualify for refinancing. Bailing out major banks and mortgage lenders was one of the most compelling reasons for cheaper rates, because they needed an emergency infusion of capital.

Refinance before it's too late

Time is of the essence, and the Fed will likely begin to nudge rates up before the end of the summer. That will likely create a panic among those who are sitting on the fence and pondering a refinance. It may also put a bur under the saddle of those who are thinking about taking out a mortgage to buy a home but haven't yet committed. Nobody wants to be left behind on the platform when the train leaves the station with easy money on board, so you can expect a surge of refinancing as soon as the first rate hike is announced.

By the time everyone else decides to hop aboard, lenders will be backlogged, loan approvals will be delayed, and rates may go up once again. First come, first serve is the rule, so you might as well get in line while the lines are still short. You won't risk losing money on the downside, because rates really can't be cut any more than they already have been-but procrastinating as they run upward may be a costly mistake.