Should You Refinance at a Higher Interest Rate?

Can a mortgage refinance still make sense if today’s interest rates are higher?

While many homeowners refinance their mortgage to take advantage of lower mortgage rates, that’s not the only reason refinancing might be smart.

In fact, plenty of homeowners could still benefit from refinancing these days — even though today’s rates are significantly higher than just a year ago.

When does it make sense to refinance at a higher rate?

1. You have an adjustable-rate mortgage and want to avoid a big rate hike.

If your current loan has an adjustable rate mortgage, that means your lower interest rate — not to mention your monthly payment — can increase annually after a certain point in your mortgage.

Though most loans have a cap on just how much your mortgage rate can increase, the uncertainty of these changes can pose a lot of financial difficulties.

Fortunately, refinancing into a fixed-rate loan can help. When you do this, you get a consistent, stable interest rate and mortgage payment for the entire life of your loan’s term — whether that’s 10 years or 30. 

2. Refinancing would help you pay off your loan faster.

If you have a long-term loan with a high-interest rate, such as a 30-year mortgage, you may be able to refinance to a shorter-term loan with a slightly higher interest rate. This can help you pay off your debt faster and reduce your total interest costs over time.

Refinancing your 30-year loan term into a 10-year term will result in a higher monthly payment but could save you significantly in the long run.

Not only are you paying mortgage interest for fewer years, but short-term loans typically have lower interest rates, too — a major perk in today’s rising-rate environment.

Paying off your home loan earlier also means financial freedom sooner. Once your loan is paid off, you’ll have more cash to save, invest, or put toward retirement goals. 

3. You have lots of high-interest debts you want to pay off.

Credit cards, personal loans, and other financial products tend to have much higher interest rates than those you find on mortgages — even with recent increases.

That means if you’re struggling to pay off high-interest cards, loans, or other debts, refinancing could work in your financial favor.

Here’s an example: Say you have a $10,000 credit card balance at a 15% rate and a $7,000 personal loan at a 9% mortgage rate.

If you do a cash-out refinance at a 6% rate, you could use the proceeds to pay off your other debts, essentially rolling them into your mortgage loan at a much lower interest rate.

In the long run, it could save you quite a bit on interest.

4. You need cash for a big or sudden expense.

If you’re facing a big medical bill or a sudden home repair, covering it out of savings is always safest.

But if that’s not possible?

A mortgage refinance may be your next best option – specifically a cash out refinance.

Again, mortgage loans typically have a much lower interest rate than other strategies you may be considering. (The average credit card interest rate is over 14% right now). 

5. You’re concerned about increasing credit card rates

When mortgage rates increase, so do credit card interest rates. According to a report in CNBC, while the pandemic stimulus funds allowed Americans to work down some credit card debts, “as the Federal Reserve raises interest rates to tame inflation, which is running at its fastest pace in more than 40 years, carrying a balance month after month will soon cost even more than it does now.”

If you’re thinking about reducing your household debt, tackling credit card debt specifically can be the factor that makes a difference in your finances overall.

Pros and Cons of Refinancing at a Higher Interest Rate

Pros:

• Lower monthly payments: Refinancing at a higher interest rate can sometimes lower your monthly payments, especially if you are consolidating high-interest debt or switching from an ARM to a fixed-rate mortgage.
• Improved cash flow: Lower monthly payments can free up cash flow for other expenses, such as savings or investments.
• Increased financial flexibility: Accessing the equity in your home or consolidating debt can provide valuable financial flexibility and help you manage your finances more effectively.

Cons:

• Higher total interest costs: Refinancing at a higher interest rate can increase your overall interest costs, especially if you extend your loan term or consolidate multiple debts.
• Longer payoff period: Extending your loan term can also increase the total time it takes to pay if you refinance to a mortgage with the same term or with an extended term.

Get a refinancing quote

The best way to determine if refinancing still works for you is to reach out to an Embrace Home Loan officer in your area today for a customized quote.

They can also answer any questions you may have or help you determine the best path forward for your goal as a homeowner.