How to Justify Refinancing if Rates are Rising

Over the last few weeks, mortgage rates have begun to rise. In hindsight, it looks like the rock-bottom rates of March spurred an increase in new applications, which well exceeded the increase in “supply” that the Fed had attempted to provide. Those who tried to time the market are naturally kicking themselves; by waiting, they may have cost themselves thousands of dollars over the life of the loan, assuming that rates don’t go back down.

If you fall into this category, don’t despair! It’s still possible for you to make refinancing financially worthwhile. The goal is to offset the higher interest rate by finding other ways to save money. Of course, it requires you to be creative- not to cut corners, just to take advantage of opportunities to achieve piecemeal savings.

Let’s start with closing costs. First of all, you should ask for the “reissue rate” when renewing title insurance, which is fair since a transfer of title is not necessary. As long as you’re not pulling money out during the refinancing, you should also be able to skimp on the appraisal. Rather than forking over a thousand dollars for a dubious official appraisal, why not settle for a simple one? You might also be able to forgo a credit check, since the lender should be “intimately familiar with your payment record.”

Speaking of the lender, you might be able to save money by refinancing with your existing lender rather than seeking out a new one. Also, you might want to roll your closing costs into the loan to avoid making an upfront payment. However, be advised that this is typically cost-effective only if you plan to remain in your home for only a few more years, in which case the closing costs can be repaid in full together with the mortgage.

Finally, there are a couple of tax benefits that you may not be aware of. First, you can deduct the points you pay on the mortgage. In the case of a refinancing, “instead of writing off those points all at once, you must spread the deduction over the life of the loan…If you refinance that mortgage again, though, you can generally deduct the remaining points in the year that your loan is paid off with the second refinancing.” In addition, you might be eligible to deduct the private mortgage insurance premium, applicable to mortgages involving a down payment of less than 20%. If you refinanced after 2007 and itemize your deductions, there is a good chance you qualify.

Even if you can’t achieve any of these additional savings, you shouldn’t rule out a refinancing. Generally speaking, it probably makes sense to refinance if closing costs can be fully “recouped” after a couple of years of lower monthly payments, although naturally this calculation can become more complicated if you alter the terms/structure of the loan.

For more information, please review the May 15 post, entitled Refinancing: Fees/Taxes Versus Interest Rate Savings, and make use of the Mortgage Refinance Calculator.