Most homeowners refinance their existing mortgage loans when interest rates are falling. And for many years, that’s what rates had done. Just last year, interest rates on 30-year, fixed-rate mortgage loans were under 3.5 percent.
But since Donald Trump won election, mortgage interest rates have steadily trended upward. Freddie Mac, in its Primary Mortgage Market Survey, said that the average interest rate on a 30-year, fixed-rate mortgage loan stood at 4.16 percent as of Dec. 15.
So as rates rise – and if they continue to do so – there is no longer a reason to refinance, right?
Not necessarily, say mortgage lenders.
Avoiding higher interest rates
Even if you can’t refinance your existing mortgage loan to one with a lower interest rate, there might still be a reason for you to refinance that loan. J. Paul Leavell, senior strategy analyst with Charlotte Metro Federal Credit Union in Charlotte, North Carolina, said that many homeowners might refinance to avoid a jump in their interest rate.
These homeowners are paying off adjustable-rate mortgages. And as interest rates rise, they face the real possibility that the rates on their mortgage loans might soon jump to higher levels. By refinancing out of an adjustable-rate loan and into a fixed-rate product, they might be able to avoid as big of a jump, Leavell said.
“When it comes to the rate game, the fear of an increasing rate is just as encouraging as the prospect of getting a lower one,” Leavell said.
The adjustable-rate challenge
An adjustable-rate mortgage starts off with adjustable mortgage rates that are generally below market value for a set period of time, say five to seven years. After the adjustable period ends, the rate adjusts according to whatever economic index it is tied to.
How often the rate will then adjust depends on the type of adjustable-rate mortgage you’ve taken out. Some feature interest rates that adjust each year. Others have rates that adjust just once every three or five years.
Homeowners nearing the adjustment period might refinance to a standard fixed-rate mortgage as a way to avoid this uncertainty and lock in a payment that won’t fluctuate so much from year to year, Leavell said. Some might worry that their rate will be even higher after the adjustment period than what it would be if they refinanced to a standard fixed-rate mortgage.
“It wouldn’t surprise me to see an increase in refinancing as more people near the end of their adjustable periods,” Leavell said. “We are actually reaching out to these people now, giving them the chance to refinance before they hit what could be a large adjustment.”
For some, refinancing still makes sense
Theresa Williams-Barrett, vice president of consumer loans and loan administration with Providence, New Jersey-based Affinity Federal Credit Union, said that some homeowners might still have high enough interest rates on their mortgages that it still makes sense for them to refinance, even if rates have risen.
Williams-Barrett said that plenty of her credit union's members still have interest rates in the 6-percent range because, for several reasons, they never refinanced when average rates on 30-year, fixed-rate loans fell to the 3-percent range.
"Some people just weren't paying attention. Others thought they might not qualify for whatever reason, but now something has changed and they can," Williams-Barrett said. "Some needed more equity in their homes to qualify for a refinance. Now their home value has risen enough so that they have this equity. They can now refinance to what will still be a lower rate for them."
Refinancing to a different term
Other homeowners might decide to refinance their loan to a different term, regardless of whether rates are rising.
A homeowner paying off a 15-year, fixed-rate mortgage might suffer a reduction in work hours. Maybe a homeowner’s spouse will lose a job, significantly reducing the household’s annual income. These owners might decide to refinance into a 30-year, fixed-rate mortgage to take advantage of the smaller monthly payments that come with such loans.
Other owners who are paying off 30-year, fixed-rate loans might decide to refinance to a 15-year loan because they want to pay a smaller amount of interest throughout the life of their mortgage. It’s true that 15-year loans come with higher monthly payments. But for homeowners who can afford these payments, a 15-year loan offers the chance to save tens of thousands of dollars in interest payments throughout the life of a loan.
“There are people who need to drop their monthly expenses," said Andrew Murdoch, president of Somerset Wealth Strategies in Portland, Oregon. "Maybe they are nearing retirement and they know they are not going to pay the house off before they sell it and downsize. They can change the term of their mortgage and gain a bit of additional spending money each month. You can cut that monthly payment pretty substantially by going from a 15-year to a 30-year mortgage."