When is it worth it to refinance to a higher interest rate?
We'll help you decide if it's a good idea to refinance your mortgage when the rate is higher.
Typically when you refinance your loan, you do so to get a lower rate and lower monthly payment, but there are other benefits of refinancing your home at a higher interest rate which can be make it worthwhile for your long term goals. Here are some reasons why to refinance your home.
- Refinancing to remove mortgage insurance. If you put a down payment of less than 20% on your loan when you purchase your home, you will need to pay Private Mortgage Insurance (PMI) each month, at a minimum, until you reach that 80/20 loan-to-value ratio. If your home's equity has increased, you may be able to refinance to get rid of PMI. The benefit of this refinancing scenario is it allows you to apply the funds previously used to pay PMI to the principal balance. Do the math to see how much more you will spend each month compared to how much you are currently spending on PMI if your rate increases.
- Refinancing to reduce the loan term. If you have a 30-year loan and want to refinance to a 15-year loan, you may have to refinance to a higher rate and will pay more in your monthly mortgage payment, but you'll save money throughout the life of your loan by cutting down the term. The benefits of this refinance? You'll pay off your home sooner.
- Refinance an adjustable rate to a fixed-rate mortgage. Many adjustable-rate mortgages (ARM) start with a low rate, but after the initial few years of the term, the rate will increase quickly. You may want to have a more predictable monthly mortgage amount with a fixed rate. Even if you refinance to a higher amount, you will likely pay less than you would after an interest rate increase a few years into the ARM. By refinancing from an ARM to a fixed rate before the initial term ends, you may be able to prevent a significant payment increase especially when interest rates are on the rise.
- Consider your overall finances and determine if it's worth it to refinance to pay off debt or improve cash flow. A cash out refinance allows you to refinance your loan for more than you owe and take out the rest in cash. If you're considering why you should refinance and get cash, keep in mind this this allows you to use that cash to pay off credit card debt or improve cash flow. Credit card rates are generally in the 10-15% range, which is much higher than a mortgage rate, so you can save in credit card interest if you roll that debt into your mortgage. You can also do a cash out refinance to improve cash flow and use that money for any expenses that may crop up.
- Refinancing to make a home improvement. Another long-term benefit of refinancing is you can tap into your home's equity to make home improvements like a finished basement, new kitchen, new roof or a pool. Major home improvements like this can help increase your home's value so you'll get more money back when you sell your home in the future.
- Refinancing to remove a borrower. In some cases you may need to determine if it's best to refinance after a divorce. If you want to remove a spouse from your mortgage due to a divorce settlement, you may need to refinance to remove them from your mortgage documents, so the responsibility changes from a joint to sole responsibility. A lender doesn't have any obligation to remove someone due to divorce, so they may require you to refinance even if it's to a higher rate. That may be better than the alternative—the possibility that your divorced spouse may have rights to your home after your death.
Depending on your situation, refinancing your current mortgage to a higher interest rate can be worth it. It may save you money in the long run or help you achieve your immediate financial goals. Find out how you can get started and learn more about available home refinance options, with Freedom Mortgage!