I once refinanced my mortgage at a higher rate. here’s why

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A higher interest rate is usually bad news, but not in this case.


Key points

  • Refinancing involves obtaining a new mortgage to replace the old one.
  • Usually people refinance to lower the interest rate they pay on their debt.
  • There are other reasons to refinance, which could sometimes justify refinancing into a higher rate loan.

Many people refinance a mortgage hoping to save money. Refinancing involves replacing one mortgage with another by applying for new financing and using the loan proceeds to pay off your current lender. Usually, it only makes sense to get a new mortgage if your interest rate on the new loan will be lower than what you are currently paying.

In the past, however, I’ve actually refinanced a new loan despite the rate being a bit higher than what I was currently paying. Although it may seem like that at first glance, it was not 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 a mortgage with a higher interest rate made sense for me — and might for you, too.

In this situation, refinancing makes sense even if the rate of the new loan is higher

There was a simple reason why I chose to refinance into a new, larger loan despite the fact that my financing costs would initially increase. I made this decision because the mortgage I had was an adjustable rate mortgage, so my current low rate was not likely to stay low for much longer.

You see, at the time I got my initial loan, I didn’t have that much financial experience and didn’t really think about the downsides of adjustable rate mortgages or ARMs. The starting rate I was offered on the ARM was lower than the 30-year fixed rate loan, so it seemed like a good deal.

However, I was only guaranteed to maintain this starting rate for a limited number of years. And I was nearing the end of that period and expecting rates to continue to rise. I didn’t want to risk my ARM financing costs exploding, so I decided it would be a better choice to refinance to a 30-year fixed rate loan, which would guarantee me the same rate for the entire term. life of a loan. This change made sense even if it meant accepting that my new loan had a higher rate than the one I was paying at the time.

The trade-off made a lot of sense: foregoing the lowest rate immediately, rather than waiting for it to start rising on its own within a short period of time, in order to achieve the guaranteed consistency of a mortgage at fixed rate.

My experience shows the disadvantages of ARMs and why accepting a higher rate may make sense

In my case, I was lucky enough to be able to refinance my home loan before my rate started to adjust. And I was lucky that even though the loan I refinanced had higher interest charges than my current mortgage, those rates were still quite reasonable and my payments were still affordable.

But, the reality is that I was still dealing with my rate going up and still had to accept refinancing into a more expensive loan. And that’s the big reason why it often makes sense to avoid ARMs. The upfront benefits they offer come with a lot of risk, and it may be best to get started right away with a 30-year fixed rate loan so you can be sure your payment won’t change for the life of your loan. .

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