Does it ever make sense to refinance at a higher rate?
Just because mortgage rates are up doesn’t mean refinancing is a moot point.
In fact, according to mortgage expert Shivani Peterson, there’s at least one good reason to refinance these days, even with the higher rates we’re seeing.
Peterson discussed this on a recent episode of The Mortgage Reports podcast. Here’s what she had to say.
Listen to Shivani on The Mortgage Reports Podcast!
Why refinancing might still be smart
“Many of you may think that you wouldn’t refinance if your interest rate were to go up… ‘It’s a no-brainer. You refinance to bring your interest rate down only. That doesn’t matter. meaning if your interest rate goes up,” Peterson said in the episode.
“Well,” she said, “there are actually scenarios in which that would make a lot of sense.”
The main ? This would be a refinance to withdraw cash and pay off debt – otherwise known as “debt consolidation refinance”.
Cash-out refinancing to pay off debts
According to Black Knight, the typical homeowner has over $200,000 of usable real estate capital.
“That means they could increase their mortgage amount and take money out of the house that they can use to literally do whatever they want,” Peterson said.
Using cash refinance funds – especially at a higher interest rate – probably wouldn’t be smart for something like buying a car or a boat (which just adds more household expenses). But it could certainly be worth consolidating high-interest debt.
“It’s about using your mortgage as a tool to improve yourself financially.”
For one, most loans and other financial products, especially credit cards, have much higher interest rates than mortgages. According to the St. Louis Federal Reserve Bank, the average credit card rate is nearly 15%. Mortgages – even at their highest levels today – are below 6%.
When you borrow against your home equity at a low rate and use those funds to pay off expensive debt, you can significantly reduce the amount of money you pay in interest each month. And it can even help you pay off your debts – or pay them off – much faster.
Refinancing to free up cash
More than that, however, refinancing might be able to free up cash flow.
“Let’s say you were going to take out $50,000, but you eliminated your car loan [and] all your credit card debt,” says Peterson. “Well, if you look at your monthly payments that are eliminated by paying off those debts…and compare that to how much your mortgage is going to increase, you could be in a position where your cash flow actually increases.”
These savings can ease financial pressure or allow you to invest more. You can put them for retirement, in an emergency savings fund, or, as Peterson recommends, directly into your mortgage to pay it off faster.
“You’re not spending anything extra each month, but you’ll pay off your mortgage faster and you’ll have eliminated those other debts and you won’t have those payments anymore,” Peterson said. “It’s about using your mortgage as a tool to improve yourself financially.”
Explore your refi options with a lender
Of course, the benefits of refinancing – especially in a higher rate environment – will vary from case to case. So if you’re considering a cash-out refinance in today’s market, speak with a qualified mortgage professional first. They can run the numbers and let you know how much your refinance could save you.
The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent company or affiliates.