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
“A lot of you might be thinking you wouldn’t refinance if your interest rate was going to go up... ‘That’s a no-brainer. You refinance to drop your interest rate only. It makes no sense if your interest rate’s going up,’” Peterson said on the episode.
“Well,” she says, “there are actually are some scenarios in which it would make a lot of sense.”
The main one? That would be refinancing to take cash out and pay off debts — otherwise known as a “debt consolidation refinance.”
Cash-out refinancing to pay off debts
According to Black Knight, the typical homeowner has more than $200,000 in tappable home equity.
“That means they could increase the amount of their mortgage and pull cash out of the home that they can use to literally do whatever they want with,” Peterson said.
Using cash-out refinance funds — especially at a higher interest rate — probably wouldn’t be smart for something like buying a car or boat (which just adds more expenses to your household). But it could definitely be worth it to consolidate high-interest debts.
“It’s all about using your mortgage as a tool to better yourself financially.”
For one, most loans and other financial products, particularly 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%. Mortgage loans — even at their higher levels today — are under 6%.
When you borrow from your home equity at a low rate, and use those funds to pay off expensive debts, you can seriously reduce the amount of money you’re paying on interest each month. And that can even help you pay your debts down — or off — much faster.
Refinancing to free up cash flow
More than this, though, refinancing might be able to free up cash flow.
“Let’s say you were going to take out $50,000, but you’d eliminate your auto loan [and] all your credit card debt,” Peterson says. “Well, if you look at your monthly payments that are being eliminated by paying off those debts... and compare that to how much your mortgage is going to go up, you might be in a position where your cash flow is actually increasing.”
Those savings can alleviate financial pressure or allow you to invest more. You could put them toward retirement, in an emergency savings fund, or, as Peterson recommends, straight back into your mortgage to pay it off faster.
“You’re not spending anything more each month, but you’ll pay off your mortgage faster and you eliminated those other debts and don’t have those payments anymore,” Peterson said. “It’s all about using your mortgage as a tool to better yourself financially.”
Explore your refi options with a lender
Of course, the benefits of a refinance — 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, talk with a qualified mortgage professional first. They can run the numbers and let you know how much your refinance could save you.