By Hal Bundrick, CFP
Rising mortgage rates are cutting the flow of mortgage refinances to a trickle. By now, many people who could have benefited from a lower rate have done so. However, if you're thinking about refinancing but are hesitating because of interest rates, there's something else to consider that can make a mortgage refinance worthwhile: rising property values.
Home prices are on the rise
Home prices were up 7.1% year-over-year in November, according to a national report just issued by real estate analytics firm CoreLogic.
"Home prices continue to march higher, with home prices in 27 states above their pre-crisis peak levels," Anand Nallathambi, president and CEO of CoreLogic, said in a release. "Nationally, the CoreLogic Home Price Index remains 4% below its April 2006 peak but should surpass that peak by the end of 2017."
You may finally be able to tap home equity
Even though mortgage rates are moving higher, appreciation in your home might let you make a mortgage move that you might not have been eligible for previously. Here's how higher home values can affect your mortgage refinance opportunities:
A cash-out refinance. If you've weighed a lower mortgage rate against loan costs and decided a refinance seems to be a toss-up, this could be the tiebreaker: a cash-out refinance. Tapping some of your home's value in a cash-out refi can let you make improvements to your home and property. That adds value to your home in the long term.
Refinance away mortgage insurance. As home prices have climbed, fewer American homeowners are underwater or face "negative equity" -- owing more on a home than its market value. In the past five years, more than 10 million households have risen above negative equity. In December, Zillow research found that fewer than 5.3 million homeowners with a mortgage are underwater. That's down from a 2012 peak of more than 15.7 million homeowners.
Rising home equity allows another refinance opportunity: removing mortgage insurance.
"If someone has an FHA loan, for example, they are paying between 0.85% and 1.35% for mortgage insurance," says Joe Parsons, branch manager at Caliber Home Loans in Dublin, California. Having home equity of 20% or more will often allow a lender to drop the mortgage insurance requirement when refinancing from a Federal Housing Administration loan to a conventional loan, he says. Home equity is the market value of the home minus the amount owed.
Don't forget about HELOCs
A home equity line of credit can provide the same access to your home's equity as a home equity loan but with the added benefit of allowing draws against your credit line as needed. When you use a HELOC for the right reasons, this can be a wealth-building strategy.
There is one possible hitch: HELOCs usually have adjustable interest rates -- something to consider in a rising-interest-rate environment.
Your monthly payment may increase regardless of your refinance rate
Refinancing is often an effort to reduce the interest rate, the loan term or the monthly payment. But despite your best efforts, in a market of rising home values, you may see your monthly payment increase. That can happen when you put property taxes and insurance premiums in escrow and prorate the annual costs into your monthly payment. With a higher home value, both may go up.
Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: hal@nerdwallet.com. Twitter: @halmbundrick.