4 Reasons for Refinancing Your Home Loan as Interest Rates Rise
Even in a rising interest rate environment, there are still some circumstances where refinancing your mortgage makes sense.
During the 1980s and 1990s mortgage interest rates dropped from as high as 15 percent to 7 percent. In recent years, interest rates continued to drop to less than 4 percent. As rates decreased it was a smart move to refinance since the lower rate more than offset the cost associated with refinancing.
Now we live at a time when interest rates are ticking up. A refinance is likely to charge higher interest than you are paying now, so your payments would go up. So, given this condition, does it ever make sense to refinance your mortgage?
Here are four circumstances where it may still make sense to refinance your home loan.
Reason for a home refinance #1: A major remodel
A lot of neighborhoods are seeing double-digit increases in home prices. People are seeing how much their homes are worth and they are tempted to “trade up.” The only problem with this is that the houses in the area that you are looking at have also increased in price. There are also the costs and hassle associated with moving.
It may be more appealing to remodel your current home with a dream kitchen upgrade or family room build-out. You can use a home equity loan to cover the construction cost, but if you do a fixed-rate refinance, you can lock in at a lower rate than a home equity loan. As long as your mortgage is $750,000 or less and the money is used for purchase or home improvements, the interest will be eligible for a tax deduction. Be sure to consult with your tax advisor to fully understand the tax implications.
Reason for a home refinance #2: Combining a home equity credit line
Maybe you have a home equity credit line and you’ve noticed your payments are increasing. That’s because these loans are variable-rate loans tied to the Prime Rate. When the Fed raises rates, the Prime Rate increases, too. You may avoid paying higher interest if you refinance your home equity credit line into your fixed-rate first mortgage.
Reason for a home refinance #3: Debt Consolidation
The average household credit card debt, that is not paid off each month, is more than $15,000. Interest rates can be as much as 20 percent — or higher — and interest payments can easily exceed $3,000 per year.
If you are facing this kind of situation, it may make sense to pay the closing costs associated with a first mortgage in order to lower the amount of interest you are paying. If you go this route, make sure you add the amount you used to pay on the credit card debt to your monthly mortgage payment so that the consolidated amount gets paid down. You don’t want to pay off your credit card debt over 30 years. For example, $15,000 in debt at a 5 percent interest rate over 30 years would cost nearly another $15,000 in interest!
Reason for a home refinance #4: Shorter Fixed Rate
Most people get a 30-year mortgage because the payments are more affordable. Other people get an adjustable-rate mortgage loan for the same reason. It is worth considering refinancing to a 15-year mortgage if the rate is lower and you can afford what will probably be a higher payment. The total interest payments for a 15-year mortgage are typically less than half of what you would pay with a 30-year mortgage loan. Who doesn’t like the idea of no more house payment after 15 years?
A first mortgage is a great financial tool to acquire a type of property that has historically increased in value. These other ideas around refinancing your home loan, if properly implemented, can also help you succeed with your finances.
If you have questions about whether a mortgage refinance is the right move for you, talk to a Zions Bank Mortgage representative.
Loans are subject to credit approval. Terms and conditions apply. See a banker for details. Equal Housing Lender. NMLS #467014.
Don Milne is Financial Literacy Manager for Zions Bank.