According to Freddie Mac’s Primary Mortgage Market Survey® (PMMS®), 30 year mortgage interest rates have risen more than one-half percent (0.5%) year to date. That fact naturally reduces the likelihood that an individual homeowner will refinance their existing mortgage, as rates were a primary reason homeowners refinanced over the last few years.
Not so fast. Not everyone was able to minimize their interest rates during the historic low rate environment because of their credit profile or down-payment. Furthermore, rates are only one component of an effective mortgage strategy – there are other logical reasons to refinance today. Let’s explore a few of them.
1. Remove Mortgage Insurance
The interest rate isn’t the only long-term cost of home financing. Many homeowners who purchased their home with less than a 20% down payment, currently pay Private Mortgage Insurance (PMI). For loans insured by the Federal Housing Administration (FHA) borrowers are paying Mortgage Insurance Premium (MIP). Those homeowners can sometimes eliminate those charges with a simple refinance. Of course, a little help from recent home appreciation can sometimes get us to the 20% equity position we need.
2. Payoff High Interest Debt
Consolidating high-interest debts such as credit cards can substantially improve monthly cash flow and take the sting out of rapidly compounding loan balances. Mortgage rates are often significantly lower than other forms of consumer financing because the debt is secured by the home. But while the longer repayment terms of a mortgage make it easier to manage, make sure additional consumer credit is handled with care.
3. Access Home Equity
While consolidating debt can improve cash flow, there are other uses of home equity that may increase personal net worth. Consider using cash from a refinance to renovate or improve the home. This can sometimes increase the property value. Others have accessed home equity to complete a degree or certification, which can open better job opportunities and increased income.
4. Change the loan terms
A refinance can be a prudent way to move to a less risky, fixed rate, mortgage. Many homeowners are still holding Hybrid ARMs or Interest-Only loans, where the terms of the loan are favorable only for a period. In a rising rate environment, it may be practical to make the change now before the rate, or repayment structure, changes.
5. Convert to a reverse mortgage
Eliminating the monthly repayment obligation may be the one thing that enables retirement for some older homeowners. A reverse mortgage can do that. If you are 62 and still working, you may even consider making payments with a reverse mortgage. Just like a traditional mortgage, the loan balance will drop with payments, but each payment will also boost the secured line-of-credit for future use.