Refinancing at a Higher Interest Rate?

Like many homeowners, to me, refinancing at the same or higher interest rate makes almost no sense, and it may not be a common strategy, as it usually means paying more in interest over the life of the loan.  However, I have heard it works when the right circumstances are present and I wanted to know what those looked like, so I brought the question up with Lexi Gleave, one of my preferred lenders.

Here are reason’s her clients have refinanced, even though their new rate is higher:

1. Lower overall monthly debt payments
2. Cash-out for debt consolidation of higher interest rate debts (credit cards/auto loans/payday loans/etc.) or to finance home improvements.
3. Equity payout due to divorce or to remove a borrower from a mortgage.
4. Switching to a reverse mortgage to no longer have a principal and interest mortgage payments.
5. Cash out to use equity to buy another property using a debt-service coverage ratio (DSCR) loan (where you put 20% – 25% down payment and the property’s income verification only is the rental amount the appraiser verifies with the appraisal).
6. Converting a new construction loan to permanent financing (rate and term mortgage).

It is important to note that refinancing to a higher interest rate has a potential drawback, such as paying more in interest over the life of the loan.  However, some studies suggest that the average American homeowner refinances their mortgage every four to five years, so the likely hood is you will not have that higher interest rate mortgage forever.

Again, it is important to carefully consider all the factors and do the math to determine if refinancing to a higher rate makes sense for your situation.  Ever situation is unique and there is no one size fits all recommendation for when or why someone might refinance a mortgage.

For a quick understanding if the math works, try this simple manual calculation (or online calculator) for calculating a blended interest rate and compare it to a current refinance rate.

Calculation Example:

• Multiply each debt amount by its interest rate to obtain the Debt Weight Factor (DWF).
  6. Debt 1: $10,000 x 6.8% = 680
  7. Debt 2: $2,000 x 3.8% = 76
  8. Debt(s) XYZ
• Add the DWFs together.
  1. 680 + 76 = 756
• Add the debt amounts together.
  1. $10,000 + $2,000 = $12,000
• Divide the “Total DWF” by the “Total Debt Amount” and then multiply by 100 to calculate the weighted average.
  6. (756 / 12,000) x 100 = 6.3%
• Round Step 4’s result to the nearest higher 1/8 of 1%, for your blended interest rate.
  6. Round 6.3% up to 6.375%

If you would like more information, or for someone to do the math for you, give Lexi a call, (435) 201-2874.

Anyway, thanks for your time.  If you’d like to connect or share your thoughts, I can be reached via email at craig@craigtheagent.com.

P.S.  Also Follow me on: Facebook,  Instagram and LinkedIn.