If a Fed Rate Hike is Expected, Should You Refinance?

Published on December 9, 2016

– 7 min read

With mortgage rates rising, many people are left asking, “Should I refinance before the next Fed rate hike?” Before we dive into that answer, let’s back up for a minute.

What is a Fed Rate Hike?

When the press reports on “rate hikes” from the Federal Reserve (aka The Fed), they are actually referring to the federal fund rate. This is the rate at which banks lend money to one another. The Fed adjusts the federal funds rate based on key economic indicators like job and wage growth, as well as other signals that point to the strength of the US economy. It’s a tool to control inflation. Inflation is also why mortgage rates are related to the Federal Fund Rate.

You see, mortgage rates are set by capital markets, according to how Mortgage-Backed Securities are trading. Historically, mortgages rates have tended to move with 10 year Treasury notes because both are influenced by the same things, including inflation. Inflation gets influenced by the Federal Fund Rate. This is why many people tend to link the Federal Fund Rate and mortgage interest rates. Often even mistakenly thinking that the government sets mortgage rates.

Long story short: if there’s a “rate hike” from the Fed, mortgage rates may also rise – but not necessarily. The best way to know about mortgage rates and where they stand is to look at mortgage rates directly.

Now that we got the reference “rate hike” sorted out, let’s get back the question at hand. Should you refinance if you expect mortgage rates to increase?

Should you refinance now?

To answer this question, first remember that predicting rates is next to impossible. And there is really only one essential question you should ask yourself: does the proposed loan meet your needs?

That answer is different for everyone. For some, the interest rate may be inconsequential because having a lower rate is not the only reason people refinance. Our advice is don’t try to time the market. Rates are still near historical lows. If you look at the history of mortgage rates, we are much closer to the floor than the ceiling. So if rates trend downward again, they have a short way to go. Whereas, if rates begin trending upward, they have a lot of room.

That said, we have a few more questions you can ask yourself to help guide your decision.

Is today’s rate lower than yours?

Most people think that if the answer is yes, then they should automatically refinance, but not so fast! While that might be a great outcome for a lot of people, it might not be best for you. Let’s say you’ve lived in your home for 12 years with a 30 year fixed loan. And let’s say you could refinance to a lower interest rate and lower your monthly payment. Sounds great. But remember: along with that lower payment comes another 30 years of paying off that loan, potentially increasing the overall amount of interest you’ll pay over the life of the loan. If you don’t need a lower monthly payment, you may want to think twice about costing yourself the additional money on interest.

Will refinancing remove mortgage insurance?

If the answer is yes, you probably want to refinance. Just a refresher: mortgage insurance is insurance you pay when you put less than 20% down. Still run the numbers, but removing mortgage insurance should lower your monthly payment and save you money in the long run. Specially if your home value has appreciated at a faster rate than you have paid your principal down. It tends to be a smart move to get rid of it when you can.

Are you willing to switch loan products?

Many people like the stability of Fixed Rate loans. However, if you’re planning on moving in a few years, it might make more sense for you to consider an Adjustable Rate Mortgage (ARM). You could have the benefit of a lower interest rate and lower payments during the introductory period before you move.

Are you planning on taking cash out to pay off debt?

You may think that you won’t qualify for a refinance due to debt burdens. However, if you’re planning on paying off that debt with the money from a Cash-Out Refinance, you may be able to qualify. This approach might not only lower your monthly payments, but it could also save you thousands of dollars over time, depending on the interest rates of other debt.

 
This list is by no means exhaustive, but if the answer to all of the above is “no,” refinancing might not makes sense for you. If the answer was yes to one of the above, refinancing might be a good call. Either way, we recommend getting loan estimates from multiple lenders or talking to a licensed loan officer before you make up your mind. It’s easy to do this with Clara: just visit our rates page to find your rate. From there, you can fill out an application online 24/7 and get your official loan estimate.

In the meantime, let’s keep a watch on those “rate hikes”!

 
Questions about your particular scenario? Chat with one of our licensed Loan Specialists. Or get your personalized rate quote in 3 minutes and see if refinancing makes sense for you now.

Jack Grace
Jack Grace is a licensed Loan Specialist at Clara. Outside the mortgage world, you’ll find him at a Giants game in San Francisco, at the beach, or exploring the Bay Area with his dog, Lucy.
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