While refinancing a mortgage is usually associated with securing a lower interest rate, some homeowners are opting to refinance at higher rates, a decision that is becoming more common for reasons beyond saving money, CNET.
“Although less common, some customers are refinancing at higher interest rates,” said Sherri Calcut, president of BOK Mortgage.
Recent data from the Mortgage Bankers Association shows a 20% increase in refinancing applications as of September, though not all are seeking lower rates.
Refinancing typically replaces an existing home loan with a new one. Although average mortgage rates remain above 6%, there are instances when refinancing at a higher rate makes financial sense.
1. Refinancing for Payment Stability
Some homeowners are moving from adjustable-rate mortgages (ARMs) to fixed-rate loans to lock in predictable payments. With an ARM, rates fluctuate after an initial fixed period, but refinancing into a fixed-rate mortgage provides payment stability, an attractive option given current economic uncertainties.
Balloon mortgages, which involve a lump sum payment after a set period, may also prompt homeowners to refinance, even at higher rates, to avoid a large payout and ensure long-term stability.
2. Refinancing During a Divorce
Divorce is another reason homeowners may refinance at higher rates. Refinancing during divorce proceedings allows one party to buy out the other and remove them from the mortgage. In these cases, homeowners may accept a higher interest rate to secure sole ownership of the property.
3. Debt Consolidation
For those with significant home equity, a cash-out refinance can be used to consolidate high-interest debt, such as credit cards or personal loans. Even with a higher mortgage rate, this strategy can reduce monthly payments and simplify debt management by rolling all obligations into one.
Considerations Before Refinancing
While refinancing can offer benefits, homeowners should also weigh potential drawbacks. Closing costs, typically 2% to 5% of the loan amount, can be substantial. Additionally, a cash-out refinance increases the mortgage balance, potentially leading to higher payments or longer loan terms.
