In the last few years, interest rates have been at record lows, which has made it possible for many people to refinance and get lower mortgage payments. Now, the opposite is happening: interest rates are going up. Freddie Mac, a large mortgage company, said that the average fixed rate for a 30-year loan was 6.31 percent last week. Still, 43.6 percent of mortgage applications during this time were for refinancing.
When rates are going up, why would anyone want to refinance? With cash-out refinancing, you refinance your mortgage for more than you still owe and keep the difference. Freddie Mac thinks that homeowners will turn $204 billion worth of home equity into cash by the end of the year. This is up from $142 billion in 2004.
- Pay off credit lines based on the value of your home. Last week, the average rate for a HELOC (Home Equity Line of Credit) went up from 5.09 percent a year ago to 6.97 percent. Most HELOC loans have variable interest rates that go up when the Federal Reserve raises short-term interest rates. Recently, the Federal Reserve raised rates for the 12th time in a row, and they made it clear that they will keep raising short-term interest rates. If you use a refinance to pay off a HELOC, the interest rate on your HELOC will go down, and you won't have to worry about the Fed, at least for your second mortgage.
- Consolidate your mortgages. If you didn't put down 20% or more on your home, you probably did a combination loan (also called a "piggyback the second mortgage") to avoid paying PMI, which is required for loans with less than a 20% down payment. The interest rates on second mortgages are usually higher, and a cash-out refinance may let you combine these loans into one with a lower monthly payment.
- Get a mortgage with a fixed rate. Rates for adjustable mortgages, which change based on what the Fed does, have gone up faster than rates for fixed mortgages. Borrowers with loans close to a rate adjustment will have to pay more each month, and rates could go up even more in the future. Many people who plan to stay in their homes are refinancing into fixed-rate mortgages to avoid higher rates and possible future increases.
- Make your home better. Rates on home equity lines of credit and second mortgages with fixed rates have been going up. A cash-out refinance can be a cheaper way to pay for home improvements, especially as the cost of the improvements goes up. Since the first loan was taken out, the value of properties that were refinanced in the third quarter of 2005 (I think) went up by 23%. Changes made after the refinancing could lead to even bigger gains.
Even though interest rates are going up, many people won't be interested in refinancing to get a lower rate. However, there are many reasons to still think about refinancing. If you already have a second mortgage, need money to pay off credit card debt, or want to make improvements to your home, refinancing your current home mortgage may be your best financial move.
