If you ever thought about refinancing your mortgage, your goal is probably to find a lower interest rate and reduce your monthly payments. After all, most homeowners aren’t inclined to trade in their current mortgage rate for a more expensive one.
Yet saving money isn’t the only reason to consider a mortgage refinance, according to Sherri Calcut, president of BOK Mortgage. “Although less common, some customers are refinancing at higher interest rates,” says Calcut.
Refinancing is on the rise, with applications increasing a sharp 20% over the last week, according to the Mortgage Bankers Association’s most recent data ending Sept. 20. However, not all of those homeowners are locking in lower rates.
For example, a traditional rate-and-term refinance may be the only option in today’s market if you want payment stability or you need to remove someone from a mortgage. A cash-out refinance, which converts your home equity to cash, may also be an option if you need to pay down other burdensome debt.
When it may make sense to refinance at a higher mortgage rate
When you refinance your mortgage, a new home loan replaces your current home loan.
The Federal Reserve has begun slashing interest rates, but consumer borrowing rates are still high, with average mortgage rates hovering above 6%. Although refinancing activity is starting to pick up, it’s less financially attractive if you purchased your home before the Fed began aggressively hiking rates in early 2022.
No one likes to give up a lower interest rate on any loan — especially one as big as a mortgage — there are some cases where refinancing to a higher rate makes sense to meet other goals.
1. Refinance for payment stability
The economic landscape has changed significantly over the last several years. With today’s high cost of living, there’s value in adding more stability to your finances.
According to Dutch Mendenhall, founder of RAD Diversified, that’s why some homeowners are switching from adjustable-rate mortgages to fixed-rate mortgages.
Whereas a fixed interest rate doesn’t change, an ARM means your mortgage rate adjusts at predetermined time intervals. With a 5/6 ARM, for example, you’ll have a fixed rate for the first five years only, after which it adjusts based on market conditions every six months. If you’re at the end of your fixed period and you don’t want your rate to change again, refinancing into a fixed-rate mortgage will give you predictable payments over the long term.
“With current fluctuations in the market, securing a predictable payment schedule can offer some homeowners peace of mind amidst economic uncertainty,” says Mendenhall.
This could also be an appealing option if you have a balloon mortgage. Balloon mortgages are typically shorter-term borrowing options that start with small payments. After a set period, the remaining balance must be paid in one lump sum. If you have a balloon mortgage and are nearing the final lump sum payment, refinancing your mortgage into a fixed rate can be advantageous, even if it means getting a higher rate.
2. Refinance during a divorce
If you’re going through a divorce, you may be forced to refinance your home at a higher interest rate. Craig Goodliffe, CEO of Cyberbacker, says that the “astronomically high divorce rate” is one reason many people are refinancing their mortgages at higher rates right now.
“When people go through a divorce and the house is in their name as a couple, one person typically has to buy out the other,” Goodliffe says.
During a divorce, refinancing your home allows you to change borrowers, giving you the option to remove the other party from the mortgage in the divorce. You’ll also be accepting a new loan structure, loan term and interest rate. That can sometimes mean giving up a really low interest rate.
If you need to buy your ex-spouse out of your mortgage, you’ll probably have to come up with a significant amount of cash. If you have sufficient equity in your home, you can get a cash-out refinance, which replaces your current mortgage with a larger loan so you can receive the difference in cash. This special type of equity buyout, often referred to as a “divorce refinance,” allows you to split assets and pay your ex-spouse their share of the home.
3. Refinance to consolidate high-interest debt
If you’ve already paid off a meaningful portion of your mortgage, a cash-out refinance can also help you pay off high-interest debt, specifically by consolidating costly credit card and personal loan debt. Even if you end up refinancing to a higher interest rate on your home loan, the rates for mortgages are still generally lower than rates charged for credit cards and personal loans.
You won’t necessarily have to accept a higher monthly mortgage payment by consolidating your debt this way. By extending your repayment period, you may be able to reduce your total monthly expenses, according to Calcut. Just make sure to weigh the pros and cons of getting a longer-term loan, since you’ll be paying a substantially higher amount in interest over a longer period.
If you’re using the lump sum of money from a cash-out refinance to consolidate your debts, you’ll no longer have to pay multiple creditors at varying rates. You’ll be able to chip away more easily at your remaining debt balance, and you’ll only need to pay off your new mortgage amount in monthly installments.
What to know about refinancing
Although refinancing your mortgage offers several benefits, there are also pitfalls to consider. First, just like when you purchased your home, you’ll need to pay closing costs with a refinance. Closing costs typically amount to between 2% and 5% of the total value of the loan. So, if you refinance your mortgage with a $200,000 balance, you’ll pay between $4,000 and $10,000 in closing costs.
It’s also important to note that with a cash-out refinance, you’ll be replacing your mortgage with a bigger mortgage and reducing your equity. The money you access from a cash-out refinance can be used for almost anything, but you’ll be left with a larger loan balance, which could result in higher payments, a longer payment term or both. Consider these drawbacks before you make a final refinancing decision.
