So you want to refinance, but mortgage rates are rising. Don’t worry — you haven’t missed the boat on your refi opportunity. Mortgage rates are still historically low, and they aren’t expected to exceed 5% in 2017, according to many economists and mortgage analysts.
Here are eight tips to help you successfully refinance your mortgage as rates rise.
1. Make your move fast
Even though rates aren’t expected to shoot through the roof this year, they’ll likely stay on a steady, upward trajectory.
“If you’re thinking about refinancing, now probably is the time to do it,” says Lauren Lyons Cole, a certified financial planner and money editor at Consumer Reports, adding that rates are probably not going to be lower than they are right now.
It’s worth doing your research to see what rate you can get and then acting swiftly before it’s too late.
» MORE: Calculate your refinance savings
2. Prepare in case rates drop
You’ll want to get your refinance application in as soon as possible, not only to catch low rates before they rise, but also to avoid a backup in refinance applications should rates suddenly fall, according to Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage.”
“This is the biggest mistake I think people make,” Fleming says. “If you’re not in the pipeline ready to go when the interest rates start moving down, all of a sudden you have to get in the back of the line, and oftentimes you miss the dip in the rates.”
Fleming says that you’re not obligated to lock in a rate when you submit your application. You can wait and watch the market for as long as you want.
If you’re not ready to submit your application just yet, work on keeping your credit score up, have your financial documents ready to go, and save money for the upfront refinancing fees. Just remember that rates are rising slowly but steadily.
3. Make sure your credit score is in good shape
Acting fast on a refinance may not be worth it if your credit score isn’t in top shape. Your credit score plays a big part in the rate you can get on a mortgage. Just because low rates are out there doesn’t mean you’ll qualify for them.
Lyons Cole says that, in some cases, your credit can be easily bolstered. “I’ve seen people’s scores go from the 500s up to the 700s in about three months just from [quick changes] on your credit report.”
Some ways that you can work on your credit include checking your credit report for errors, paying your bills on time and keeping a safe distance from your credit limit.
“Mortgage rates aren’t going to go up a full point between now and the next three months,” Lyons Cole says. “Taking the time to get your credit score to a place where you qualify for the best possible rate could make a huge difference over the course of a 30-year mortgage.”
4. Use rising home prices to your advantage
Along with rates, home values are rising. Now might be a good opportunity for you to tap into your home’s equity through a cash-out refinance. If you do so, proceed with caution. It’s risky to spend the proceeds from a cash-out refi on things that don’t rebuild your equity, like a car.
You can also access your home’s increasing value through a home equity loan or home equity line of credit.
5. Refinance into an ARM
Refinancing into an adjustable-rate mortgage in a rising rate environment can make sense since these loans tend to come with lower initial interest rates than fixed mortgages. They’re especially useful if you plan on staying in your home no longer than the fixed term of the loan.
Jenny Erdmann, a certified financial planner and vice president of Guide My Finances in San Diego, says that as long as an ARM makes sense for you and you’re aware of the drawbacks with this type of loan — like the possibility that your rate may eventually increase — you should try to get the lowest rate you can.
6. Refinance to a shorter term
Refinancing into a shorter-term fixed-rate loan can save you money in two ways: the interest rate is lower than a 30-year fixed-rate loan, and the shorter term means you’ll save more money over the life of the loan by paying less interest.
Here’s an example: Using NerdWallet’s refinance calculator, we plugged in the numbers for a 30-year, $300,000 mortgage taken out in 2010 with a 4.75% fixed interest rate. We refinanced it to a 15-year mortgage with a 3.50% fixed interest rate. Savings equated to $52,975 over 15 years. While your original monthly payment of $1,565 would take on an extra $311 each month, you would save more money in the long run and build equity faster.
Take into account that if a 3.50% interest rate went up a quarter of a percentage point, your savings would decrease to $47,145 over a 15-year period, and your monthly payment would increase by $344.
7. Pay points
Before your loan closes, you’ll have the option to pay points on your mortgage, which is paying money upfront, to permanently lower your interest rate. Fleming says that “if the additional cost makes sense, then absolutely pay points.”
While one point equals 1% of your loan amount, you won’t always have the option to pay in full points. The amount of money you have to pay to buy down your rate depends on the interest rate market, according to Fleming. He says that if the market is volatile, then you’ll probably have to pay more to buy down the rate. But if the market is stable, then you’ll pay less. Fleming says that it might make sense for you to wait until rates stabilize so you can pay less.
8. Refinance out of an ARM, HELOC
If you’re concerned about the interest rate rising on your adjustable-rate mortgage or on your home equity line of credit, refinancing to a fixed-rate product can allow you to lock in a new rate to make your monthly payments more predictable.
Fleming says that borrowers with a HELOC should watch out for the recast period. That’s when the draw period ends and you can no longer pay just the interest on the loan. Since rates are increasing, “anybody with a HELOC should definitely look at their options,” says Fleming.
Your options include calling your bank and seeing if you can switch your HELOC to a fixed rate, though the rate may go higher if you do. You can also refinance the HELOC into a home equity loan at a fixed rate. Another option is to refinance your first mortgage and wrap the second mortgage into it. However, Fleming says if you end up refinancing to a higher rate, this strategy wouldn’t make much sense.
Michael Burge is a staff writer at NerdWallet, a personal finance website. Email: [email protected].
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