This Is the Only Time It Makes Sense to Refinance to a Mortgage at a Higher Rate

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KEY POINTS

  • Refinancing means taking out a new home loan to repay your existing mortgage debt.
  • Refinancing makes the most sense if you can drop your rate and reduce the cost of borrowing.
  • It may make sense to refinance, even to a higher rate, if you're switching from an adjustable rate mortgage.

Is refinancing right for you even if you can't drop your rate?

Many homeowners will refinance their mortgage at some point during the repayment process. When you refinance, you borrow money either from the same mortgage lender you currently have or from a different one. You use the proceeds from the refinance loan to pay off your current mortgage.

The purpose of refinancing is to change the terms of your existing debt. Instead of continuing to pay your old lender, you will be paying an entirely new loan. And that new loan may have a different payoff timeline, interest rate, and monthly payments.

In most cases, it makes sense to refinance to a new home loan only if the interest rate on the new loan is a lower one. After all, interest is the cost to borrow, and it may make little sense to take out a new loan that charges you more for the debt you've taken on.

However, there is one situation where you may want to think about refinancing even if you can't qualify for a rate as low as the one on your existing loan. Here's why you may want to take this step.

When refinancing to a higher-rate loan makes sense

Refinancing to a new loan at a higher interest rate would make sense only if you are considering switching from an adjustable rate mortgage (ARM) to a fixed rate loan.

Adjustable rate loans and fixed rate loans work differently. If you have a fixed rate mortgage, your interest costs don't change for the whole time you're paying back your debt. You'll know the total interest expenses that you'll incur up front and will also understand exactly how much your loan will cost you each month and over time.

If you have an adjustable rate loan, though, you may qualify for a lower introductory rate -- but that rate won't be yours to keep for the life of the loan. After a set period of time, such as three, five, or seven years, your rate can begin fluctuating. It's going to be tied to a financial index and move with it.

If you have an ARM, your current rate and payment may be lower than what you could get if you refinanced, but it's very possible that the rate could go much higher over time. This is especially true when rates are on the rise, as they currently are.

How could refinancing to a higher-rate loan help you?

If you have the opportunity to refinance to a fixed rate mortgage -- even if the rate is a little higher than you are currently paying -- you may be better off doing so in the long run. This is especially true if you won't increase your current rate by a lot and if your rate is going to begin adjusting soon.

Switching to a fixed rate loan would provide you with more certainty going forward, so you wouldn't have to worry about your loan costs going up even higher over time. That could be well worth accepting a small bump up in rate now rather than risking a larger future one later on.

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