Mortgage rates rise again, yet refis linger
By Holden Lewis • Bankrate.com

Sometimes you can save money by refinancing your primary mortgage at a higher rate. There is evidence that borrowers are doing just that.

Meanwhile, long-term mortgage rates didn't move much this week. The benchmark 30-year fixed-rate mortgage rose 3 basis points to 6.67 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.36 discount and origination points. One year ago, the mortgage index was 5.81 percent; four weeks ago, it was 6.51 percent.

It was the sixth consecutive week that the 30-year fixed rate increased. The last time the rate was this high was in June 2002.

The 15-year fixed-rate mortgage rose 2 basis points to 6.29 percent. The 5/1 adjustable-rate mortgage rose 1 basis point to 6.32 percent.

Refis remain, but reasons change
This week was out of character. For the last few months, short-term mortgage rates have risen faster than long-term rates. That has encouraged a wave of cash-out refinancing -- a refinance in which the new loan balance is bigger than the old loan balance. In the first three months of 2006, according to Freddie Mac, 88 percent of refi borrowers ended up with a higher balance, and more than half ended up with a higher rate as well.

"Almost no one is refinancing to reduce their interest rate in today's environment," Freddie Mac Chief Economist Frank Nothaft says.

Those borrowers aren't crazy; they're doing some math and discovering that they can lower their total monthly debt payments by using cash-out refinances to pay down the balances on their higher-rate credit cards and home equity lines of credit.

"You have to get out a pad and a pen a lot of times," says Bob Moulton, president of American Mortgage, a brokerage that does business in New York and neighboring states, plus Florida. "You write down what you are paying on your mortgage, your Visa, your MasterCard, your home equity line of credit every month. Then you calculate your monthly costs, if you did a cash-out refi, and the numbers speak for themselves."

Here's the kind of calculation you do. Let's say you got a 3/1 ARM a couple of years ago, borrowing $300,000 at 5.5 percent. You opened an equity credit line a year and a half ago at 4.5 percent, and immediately borrowed $30,000 against it for a minimum monthly payment of $112.50. Back then, the total monthly payments for the two loans was $1,815.87.

Next week, the credit line will sport a rate of 8 percent, raising the minimum monthly payment to $200 and the total monthly mortgage payments to $1,903.37.

ARMs resetting, too
And the adjustable-rate primary mortgage will reset next year, probably raising the rate north of 7 percent. Not only that, but the lifetime cap on the ARM's rate is around 11 percent, so your monthly payments conceivably could go much higher in a few years.

If you plan to remain in the house for a few more years, it suddenly looks like a smart move to replace the ARM with a higher-rate, fixed-rate mortgage. "I call that insurance," Moulton says.

You could replace the ARM with a $300,000 fixed-rate mortgage and not touch the balance on the credit line. At a new primary mortgage rate of 6.5 percent, that raises your total minimum monthly payments to $2,096.20. You're bumping your monthly payments up by almost $200, but that beats the payment shock you would suffer next year if you kept the ARM.

The total monthly payment is a bit cheaper than that if you do a cash-out refi to pay off the credit line's balance. In that case, a $330,000 loan at a fixed rate of 6.5 percent gives you a monthly payment of $2,085.82. Better yet, you're now paying off the principal from that line of credit instead of paying only the interest on that debt.

Everyone's situation is different, and, as Moulton says, you have to take pen (or pencil) to paper and calculate your total monthly payments under various scenarios. You can figure out the pretax implications by using Bankrate.com's calculators, including the mortgage payment calculator.