This Is the Only Time It Makes Sense to Refinance to a Mortgage at a Higher Rate (2024)

FAQs

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

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 lot of high-interest debt, getting a cash out refinance at a higher interest rate than your current mortgage rate might make sense. With a cash out refinance, you replace your current mortgage with a new mortgage for a higher amount and get the difference in cash at closing.

Historically, the rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2%. However, many lenders say 1% savings is enough of an incentive to refinance. Using a mortgage calculator is a good resource to budget some of the costs.

By choosing a shorter loan duration, you can cut down the total interest paid throughout the life of the loan. These savings stem from two key factors: shorter-term mortgages typically attract lower interest rates than their longer-term, and the shorter repayment period also means interest accumulates for less time.

Your servicer wants to refinance your mortgage for two reasons: 1) to make money; and 2) to avoid you leaving their servicing portfolio for another lender. Some servicers will offer lower interest rates to entice their existing customers to refinance with them, just as you might expect.

Will mortgage rates go down—and stay there? The general consensus among industry professionals is that mortgage rates will slowly decline in the last quarter of 2024. The projected declines have shrunk, though, in recent months. At the start of the year, for instance, Fannie Mae predicted rates would drop to 5.8%.

Key Takeaways. Don't refinance if you have a long break-even period—the number of months to reach the point when you start saving. Refinancing to lower your monthly payment is great unless you're spending more money in the long-run.

If you have a mortgage with a higher balance and rate, a drop of 0.5% interest could be worth refinancing, according to Dell. "For a lower balance, rate and term refinance, it may be at least 1% or more to be worth your time and money," Dell says. It's also important to consider how long you plan on living in the home.

How Much Difference Does 1% Make On A Mortgage Rate? The short answer: It can produce thousands or even potentially tens of thousands in savings in any given year, depending on the purchase price of your property, your overall mortgage rate, and the total amount of the mortgage being financed.

When you refinance, do you start over? ›

Once you refinance, it's like you're starting over. Say you've been paying off your old mortgage for 10 years, and you have 20 years to go. If you refinance into a new 30-year mortgage, you're now starting at 30 years again.

Depending on what kind of loan you are eligible for, refinancing might offer you one or more benefits, including: a lower interest rate (APR) a lower monthly payment. a shorter payoff term.

It's usually better to make extra payments when:

If you can't lower your existing mortgage rate, a refinance likely won't make sense. In this case, paying extra on your mortgage is a better way to lower your interest costs and pay off the loan faster. You want to own your home faster.

Why does refinancing cost so much? Closing costs typically range from 2 to 5 percent of the loan amount and include lender fees and third-party fees. Refinancing involves taking out a new loan to replace your old one, so you'll repay many mortgage-related fees.

Negatively Impacting Your Long-Term Net Worth

Refinancing can lower your monthly payment, but it will often make the loan more expensive in the end if you're adding years to your mortgage. If you need to refinance to avoid losing your house, paying more, in the long run, might be worth it.

When people refinance, they change the terms of their loan with their bank or lender so they are paying a lower monthly interest rate. While that means less in loan payments for lenders, homeowners must pay application and closing fees to get this deal, which is immediate revenue for those lenders.

As a rule of thumb, it's usually worth it to refinance if you could lower your current rate by one percent. One percentage point is a significant rate drop, and it should generate meaningful monthly savings in most cases.

You might get a better mortgage rate by refinancing

An often-quoted rule of thumb says that if mortgage rates are lower than your current rate by 1% or more, it might be a good idea to refinance.

How Much Difference Does 1% Make On A Mortgage Rate? The short answer: It can produce thousands or even potentially tens of thousands in savings in any given year, depending on the purchase price of your property, your overall mortgage rate, and the total amount of the mortgage being financed.

Home equity loan

These loans typically offer a lump sum of money, which is repaid over a fixed period, much like a traditional mortgage. One key benefit is that you keep your current mortgage, and its rate and terms.