Most of us want to get a mortgage at the lowest possible interest rate and will make home buying decisions based upon getting a rate as low as possible. But as most of us know, mortgage interest rates go up and down, and there can be times when we want to refinance and possibly pull out cash even when our rate may end up higher. With mortgage rates trending upwards this year it really begs the question, how much do you really need the cash out of your mortgage if it causes your interest rate and monthly payment to rise. Is it worth refinancing today?
In some situations, it really can make sense to refinance your low rate mortgage into a higher rate. Before starting the application process, make sure you are understand today’s cash-out refinance rules so you can make an educated financial decision.
Below are some of the reasons why people do this.
#1 Take Out Equity
Probably the most common reason that people refinance a mortgage even if it means taking a higher rate is to pull out cash. Home prices are really going up in 2018, and people have hundreds of billions of dollars in equity in their homes. Many Americans do not want to sell their home to trade up to a bigger or better one because prices and interest rates are higher.
Instead, they are pulling out cash and doing home improvements. If you have more than 20% equity in the home, you may be able to do a refinance and pull out tens of thousands of dollars in equity to do home improvements that add value to the home.
You also can pull the cash out and do whatever you like with the money. Some people like to use the money to buy investment properties, while others use it to pay for a college education.
#2 Pay Off Debt
Some people have a lot of high interest debt and they may want to trade in the lower interest rate mortgage for a higher one if it will help them to pay off high interest debt. If you have credit cards you pay 25% interest on each year, you will save a lot with paying off debt with a refinance even if you are paying two percentage points more on your mortgage than you used to.
Doing this can make sense but be sure you do not run up credit cards again or now you will owe more on your mortgage at a higher rate and have more credit card debt. In some cases, when consolidating consumer debt, cash-back refinancing can lower your monthly payments and save you money.
#3 Lock in a Fixed Rate
We are in a rising interest rate environment in 2018 and beyond it looks like. If you have a lower rate adjustable mortgage that is going to reset to a higher rate, you may want to refinance into a fixed rate mortgage. An adjustable rate mortgage can be very useful when the rates are lower, but when you get close to the end of the fixed period on the ARM, the rate can go up quite a bit.
Some home owners are better off just doing a fixed rate refinance before the ARM resets. The ARM can also go up again each year, so getting that fixed rate mortgage now can save you big down the road.
#4 Dump Mortgage Insurance
If you bought your home with a low-down payment, odds are you pare paying for mortgage insurance. If you have more equity today, you may be able to refinance to get rid of the mortgage insurance. However, you should really crunch the numbers to see if you are going to be able to save more by dumping mortgage insurance; if you are paying a higher rate, it may not be worth it.
#5 Shorten the Term
A good reason to trade in a lower interest rate fixed mortgage is if you want to go from a 30 year to a 15-year loan. Fifteen-year mortgages always have a lower interest rate than a 30-year loan because they are less risk for the lender. If you can handle the higher payment of a 15-year loan, you could save tens of thousands of dollars over the life of the loan.
#6 Take Off a Borrower
There are some situations where you do not have a choice but to refinance, such as when there is a court order in a divorce proceeding. The only way to get your ex-spouse off the mortgage is to do a refinance. You may not really want to trade in that low rate mortgage for a higher rate one, but the ex-spouse needs to come off the mortgage if the court says to do so.
While most people do not do it, there are legitimate reasons to trade in a lower rate mortgage, including pulling out cash. Before you do this, you should check the numbers carefully to make sure that trading in that low rate mortgage is really a smart financial move. The days of sub-4% mortgages are behind us for now, and you should be certain that you really need to dump that low rate mortgage for a higher rate one.