When to Consider Refinancing Your Mortgage Even When Rates Are High

If you have been considering refinancing but are worried about interest rates, you are not alone. Mortgage interest rates continue to challenge prospective homebuyers and refinance candidates alike. Everyone knows that interest rates have risen from record lows just a few years ago and have yet to come back down. Because of this, many homeowners are wondering: Why should I refinance when interest rates are high?

The instinct is often to wait for rates to fall again. But in certain situations, refinancing your mortgage can still make sense even in a high-rate environment, and in some cases, it can improve your overall financial picture.

Continue reading to find out when it makes sense to refinance your mortgage, even if today’s rates aren’t ideal.

The Current Mortgage Landscape: High Rates, High Equity

Over the past few years, home values across much of the country have surged. Values have appreciated by nearly 8-9% per year over the past 5 years according to the Federal Reserve Bank of St Louis. This is far greater than the historical averages of 3.5%-4.5%.

The recent surge in home values has created significant home equity for many homeowners. Any increase in your home’s value above your loan balance adds to the equity you have. This equity can give you more financial flexibility and borrowing power.

At the same time, many households are carrying higher levels of credit card debt and personal loans with interest rates well above today’s mortgage rates.

If both of those scenarios are true for your situation, there may be an opportunity to benefit from a mortgage refinance. While your new mortgage rate might be higher than your current one, the right type of refinance can still help you consolidate debt, access cash for major expenses, or adjust your loan terms to better fit your needs.

When Does It Make Sense to Refinance, Even with High Rates?

1. Tap into Home Equity with a Cash-Out Refinance

A cash-out refinance allows you to access your home’s equity by taking out a larger mortgage and receiving the difference in cash. This can be beneficial depending on your financial goals:

1. Renovate or upgrade your home
2. Pay for higher education
3. Cover significant life events or one-time expenses
4. Build an emergency fund

Even if rates are higher than your current mortgage, the ability to use your equity productively may outweigh a higher monthly payment.

2. Consolidate High-Interest Debt

Many homeowners carry credit card balances or personal loans with interest rates exceeding 20%, and in many cases, well over that. In fact, according to the Federal Reserve, total U.S. consumer credit card debt recently surpassed $1.34 trillion, the highest level on record. Meanwhile, the average credit card interest rate now exceeds 21% APR, leaving many households paying significant amounts of interest each month.

Even if your mortgage interest rate increases, taking out a debt-consolidation loan can help. In this environment, refinancing your mortgage, even at a higher rate than your current home loan, can help consolidate high-interest debt into a single, lower-interest mortgage payment. Keep in mind that converting unsecured debt to secured debt may increase the risk of foreclosure if you’re unable to make payments.

This strategy can:

1. Lower your total monthly debt payments
2. Improve your credit score by reducing revolving debt
3. Provide breathing room in your budget
4. Streamline your finances so that you only have to pay one bill instead of many

3. Change Loan Terms for Financial Stability

In a rising-rate environment, many homeowners with adjustable-rate mortgages (ARMs) may want to refinance into a fixed-rate loan to lock in stability, even if the rate is somewhat higher than their current ARM’s teaser rate.

Additionally, some borrowers may choose to refinance to shorten their loan term (for example, moving from a 30-year to a 15-year mortgage), allowing them to build equity faster and reduce long-term interest costs.

4. Remove Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) is a supplemental insurance policy you may be required to obtain to get a mortgage. PMI protects the lender, not the borrower, in case of loan default. It typically adds 0.5% to 1.5% of the loan amount per year to your mortgage costs.

If your home has appreciated significantly in value or if you’ve paid down enough of your principal balance, you may now have at least 20% equity in your home, subject to lender approval and program guidelines. In that case, refinancing can be a smart way to eliminate PMI altogether.

Even if today’s interest rates are somewhat higher than your existing rate, the savings from dropping PMI can help offset or even exceed the impact of a higher rate on your monthly payment.

5. Address Life Events or Changing Financial Goals

There are times when refinancing is about more than rates:

• Divorce settlements
• Business opportunities
• Estate planning
• Changing household income

In these situations, accessing home equity or restructuring mortgage terms through a refinance may make financial sense regardless of market rates.

How to Evaluate If Refinancing Makes Sense for You

Before making a decision, it’s important to calculate the break-even point on a refinance. This is how long it will take to recoup the costs of refinancing through monthly savings or other financial benefits.

Factors to consider include:

• Closing costs and fees
• New loan term and monthly payment
• Total interest paid over time
• How long you plan to stay in the home

The right time to refinance is different for every homeowner. It depends on your individual financial goals, your current mortgage terms, your home equity position, and your long-term plans. Sometimes, the opportunity to tap into equity, remove PMI, or consolidate debt can outweigh the impact of today’s interest rates. In other cases, maintaining your current loan may be the best move.

At First Heritage Mortgage, we take the time to understand your unique situation, not just your interest rate. Whether you’re looking to access home equity, improve cash flow, or plan for the future, our experienced team can help you explore whether refinancing makes sense for you now or if it may be smarter to wait.

Ready to explore your options? Connect with us today for a personalized refinance consultation. We’ll help you run the numbers and make the choice that’s right for you and your family.