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A higher interest rate is usually bad news, but not in this case.
Key points
- Refinancing involves getting a new mortgage to replace the old one.
- Usually, people refinance to lower the interest rate they are paying on their debt.
- There are other reasons to refinance, which could sometimes justify refinancing into a higher-rate loan.
Many people refinance a mortgage in hopes of saving money. Refinancing means replacing one mortgage loan with another by applying for new financing and using the loan proceeds to pay back your current lender. Usually, it makes sense to get a new mortgage only if your interest rate on the new loan will be less than you are currently paying.
In the past, however, I actually refinanced to a new loan despite the fact that the rate was quite a bit higher than I was currently paying. Although it might sound like it at first glance, this wasn’t a bad financial choice. In fact, it was a smart move that ended up saving me money in the long run.
Here’s why making the decision to refinance to a mortgage loan with a higher interest rate made sense for me — and might for you as well.
In this situation, refinancing makes sense even if the rate on the new loan is higher
There was one simple reason why I chose to refinance into a new higher loan despite the fact that my financing costs would initially go up. I made this decision because the mortgage that I had was an adjustable-rate mortgage so my current low rate was not likely to be low for much longer.
See, at the time I got my original loan, I wasn’t as experienced financially and I didn’t really think much about the downsides of adjustable-rate mortgages or ARMs. The starting rate that had been offered to me on the ARM was lower than the 30-year fixed-rate loan, and so it seemed like a good deal.
I was only guaranteed to keep that starting rate for a limited number of years, though. And I was coming near to the end of that time period and expected rates to continue going up. I did not want to take the chance of my ARM’s financing costs going through the roof, so I decided it would be a better choice to refinance into a 30-year fixed-rate loan, which would guarantee me the same rate through the life of the loan. This switch made sense even though that meant accepting that my new loan would have a higher rate than I was paying at the time.
The trade-off made a lot of sense: give up the lower rate right away, rather than waiting for it to start going up by itself in a short time, in order to get the guaranteed consistency that a fixed-rate mortgage comes with.
My experience shows the downsides of ARMs, and why accepting a higher rate can make sense
In my case, I was lucky to be able to refinance my home loan before my rate began adjusting. And I was fortunate that while the loan I refinanced into had higher interest charges than my current mortgage, those rates were still pretty reasonable and my payments were still affordable.
But, the reality is, I still faced my rate going up and I still had to accept refinancing into a more expensive loan. And that’s the big reason why it often makes sense to steer clear of ARMs. The initial upfront benefits they provide come with a lot of risk, and it may be better to start with a 30-year fixed-rate loan right away so you have the confidence of knowing your payment won’t change over the life of your loan.
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Mortgage rates are on the rise — and fast. But they’re still relatively low by historical standards. So, if you want to take advantage of rates before they climb too high, you’ll want to find a lender who can help you secure the best rate possible.
That is where Better Mortgage comes in.
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