May 12, 2023
Reasons when refinancing to a higher rate can make sense
You’re going to refinance your mortgage at some point and changing the terms of your existing debt with a different payoff timeline, interest rate, or monthly payment, can save money over the life of the loan. Typically, it makes the most financial sense to refinance into a lower interest rate, but in some circumstances refinancing into a higher rate can still give you leverage.
When you should refinance to a higher rate
There are some situations when more factors than rate should be considered, for example, how much money you can put down, how long you plan to live in the home, mortgage insurance premiums, and loan eligibility standards and regulations. Here’s when it makes the most sense to crunch the numbers and focus on your long-term financial goals, instead of rate alone.
You need to tap into your home equity.
Whether you need extra money to make home improvements, consolidate debt, or start an emergency fund, tapping the equity in your home is an easy way to generate cash flow. A cash-out refinance is a type of refinancing that provides you with a larger mortgage in exchange for tapping your equity. This new loan replaces the existing loan, and in exchange, you receive a check. The new mortgage will have a higher loan amount at the same term, or extended term.
A person needs to be removed from the loan.
Whether you have a former spouse, family member, roommate, or business partner you need to remove from your mortgage, a refinance can achieve this. However, if current market rates are higher than your existing mortgage, you will need to accept the new rate.
You need to pay off high-interest debt.
If you have racked up a lot of debt with personal loans and credit cards, applying for a cash-out refinance with a higher interest rate makes sense if the new mortgage is still lower than the rates of your other debts.
Your ARM is due to reset soon.
If your loan is an adjustable-rate mortgage, monthly interest rates fluctuate and depend on the current market. If you change your current loan to a fixed-rate mortgage, your monthly interest payments will stay the same over the life of the loan and offer more security, but your interest rate may be a little higher.
You want to stop paying mortgage insurance premiums (MIP).
Typically, mortgage insurance premiums are on mortgages backed by the Federal Housing Administration (FHA loan). If your eligibility requirements have changed since you purchased your home, it might be a good idea to refinance into a conventional loan if you have at least 20% equity in your home, otherwise, you will pay private mortgage insurance (PMI). When making your decision, determine the costs of refinancing at a higher rate and the closing costs you will pay, versus mortgage insurance premiums.
Your home is in a “hot market” area and you want to invest.
If property values are rising where you live, considering a cash-out refinance to access the equity in your home can be a great way to start a new business or invest in real estate and start growing your wealth.
Ultimately, there are many factors other than interest rates to consider when refinancing. If you are in a better financial position after crunching the numbers, the rate doesn’t matter. Ask your loan originator to help you calculate if a refinance is right for you.
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