Refinancing in a rising rate environment

Published on Jul 01, 2021

Refinancing in a rising rate environment

If interest rates are rising, you shouldn’t view that as a sure sign to put off refinancing your mortgage. When any of these 5 situations occur, it might indicate a good time to call for refinancing.   

Current loan is at a high interest rate

Even if interest rates are rising, they can still be competitive. Refinancing can lower your monthly payments if your current rates are higher than the existing rate for a new loan. This may be the case if you have recently improved your credit score or if you have an older mortgage.   

Need to change terms

With an Adjustable Rate Mortgage (ARM), the interest rate is recalculated periodically and could result in higher interest rates for your current mortgage. If you are nearing an adjustment period, it can be a good idea to refinance into a fixed rate mortgage. On the other hand, ARMs have an initial period of competitively lower rates. If you plan to move in the next few years, refinancing into an ARM can be a wise strategic move. 

Eliminate mortgage insurance

Private Mortgage Insurance (PMI) is typically included in most loans that originated with less than a 20% down payment (A VA loan is one type of loan that does not require mortgage insurance). This covers the banks in case the borrower defaults. With some loans, the PMI is automatically removed when your equity reaches 20% of the home’s value, but many loans have the PMI embedded. If this is the case, refinancing is the only way to remove this extra payment.  If your equity has increased enough, taking a higher interest rate could still lower your monthly payment. 

Wish to add or remove a borrower

You may want to refinance for personal reasons if you need to change the accountable parties on the loan. A recent divorce or new marriage are events that may warrant a refinance. 

Want to get cash from built up equity – You can leverage the equity you have in your house to borrow more money. You may want cash to pay for repairs or renovation, medical expenses, or pay down other high interest debt. In this case it can benefit you to refinance, even when rates are going up.