Some homeowners are refinancing their mortgages at higher rates. Here’s why

If you’ve ever thought about refinancing your mortgage, your goal is probably to find a lower interest rate and lower your monthly payments. After all, most homeowners are not inclined to exchange their current mortgage interest rate for a more expensive one.

Still, saving money isn’t the only reason to consider a mortgage refinance Sherri Calcutchairman of BOK Hypotheek. “Although less common, some customers are refinancing at higher interest rates,” Calcut says.

Refinancings are on the rise, with applications rising a sharp 20% in the past week, according to the Association of Mortgage Bankers the most recent data ends on September 20. However, not all of these homeowners lock in lower rates.

For example, a traditional interest-rate, term-based refinance may be the only option in today’s market if you want payment stability or want to get someone out of a mortgage. A cash-out refinance, which converts your home equity into cash, may also be an option if you have other difficult debts to pay off.

When it may make sense to refinance at a higher mortgage interest rate

When you refinance your mortgage, a new home loan replaces your current home loan.

The Federal Reserve has started lowering interest rates, but consumer loan rates are still high, with the average mortgage rate hovering above 6%. Although refinancing activity is starting to pick up, it’s less financially attractive if you bought your home before the Fed started raising rates aggressively in early 2022.

No one likes to give up a lower interest rate on a loan – especially one as large as a mortgage – there are some cases where refinancing at a higher interest rate makes sense to achieve other goals.

1. Refinance for payment stability

The economic landscape has changed significantly in recent years. With today’s high cost of living, adding more stability to your finances is valuable.

According to Dutch Mendenhallfounder of RAD Diversified, that’s why some homeowners are switching from variable-rate mortgages to fixed-rate mortgages.

While a fixed interest rate doesn’t change, an ARM means your mortgage rate adjusts at predetermined time intervals. For example, with a 5/6 ARM, you only have a fixed rate for the first five years, after which it adjusts every six months based on market conditions. If your fixed term is coming to an end and you don’t want your interest rate to change again, refinancing to a fixed-rate mortgage gives you predictable payments over the long term.

“With the current market fluctuations, securing a predictable payment schedule can provide some homeowners with peace of mind amid economic uncertainty,” says Mendenhall.

This can also be an attractive option if you have a balloon mortgage. Balloon mortgages are typically shorter-term borrowing options that start with small payments. After a certain period, the remaining balance must be paid in one go. If you have a balloon mortgage and are nearing final payment, refinancing your mortgage to a fixed rate can be beneficial, even if it means getting a higher interest rate.

2. Refinance during a divorce

If you get divorced, you may be forced to refinance your home at a higher interest rate. Craig GoodliffeCEO of Cyberbacker, says the “astronomically high divorce rate” is one of the reasons many people are currently refinancing their mortgages at higher rates.

“When people get divorced and the house is in their names as a couple, one usually has to buy the other out,” says Goodliffe.

During a divorce, refinancing your home allows you to switch borrowers, giving you the opportunity to remove the other party’s mortgage from the divorce. You also accept a new loan structure, loan term and interest rate. This can sometimes mean that you have to quote a very low interest rate.

If you need to bail your ex-spouse out of your mortgage, you will likely need to come up with a significant amount of cash. If you have enough 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 stock buyout, often called a “divorce refinance,” allows you to split your assets and pay your ex-spouse his share of the home.

3. Refinance to consolidate high-interest debt

If you’ve already paid off a significant portion of your mortgage, a cash-out refinance can also help you pay off high-interest debt, especially by consolidating expensive credit card and personal loan debt. Even if you end up refinancing your home loan at a higher interest rate, mortgage rates are still generally lower than credit card and personal loan rates.

You don’t necessarily have to accept a higher monthly mortgage payment by consolidating your debts this way. By extending your repayment period, you may be able to reduce your overall monthly expenses, according to Calcut. Make sure you weigh the pros and cons of taking out a loan with a longer term, as you will pay a significantly higher amount of interest over a longer period of time.

If you use the lump sum of a cash-out refinance to consolidate your debts, you no longer have to pay multiple creditors at different rates. You can pay off your remaining debt more easily and you only have to pay off your new mortgage amount in monthly installments.

What you need to know about refinancing

While refinancing your mortgage offers several benefits, there are also pitfalls to consider. First, just like when you bought your home, you’ll have to pay closing costs when you refinance. Closing costs are typically 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 replace your mortgage with a larger mortgage and reduce your equity. The money you get through 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 disadvantages before making a final refinancing decision.