When mortgage rates are low, refinancing often seems like a no-brainer. Lower rates mean lower monthly payments, reduced interest costs, and, in some cases, a shorter loan term. But what about when interest rates are rising? Does refinancing still make sense?
The short answer: It depends on your financial goals, your current loan, and the type of refinance you’re considering. In a higher-rate environment, the math gets more nuanced — but for many homeowners, refinancing can still be a strategic move.
This article will walk you through when refinancing is (and isn’t) worth it when interest rates rise and how to know if it’s the right time for you.
What Is Mortgage Refinancing?
Refinancing is replacing your current mortgage with a new one — usually to achieve a better interest rate, lower monthly payment, or different loan term.
There are several types of refinances, including:
- Rate-and-term refinance — Adjusts your interest rate, loan term, or both.
- Cash-out refinance — This lets you tap into home equity and receive cash at closing.
- Streamline refinance — A simplified process available for FHA, VA, and USDA loans, often requiring limited documentation.
Why Refinance When Rates Are Rising?
It may seem counterintuitive to refinance when interest rates are going up. But here are several real-world reasons why it can still be worthwhile:
1. You Need to Tap into Equity
A cash-out refinance allows you to borrow against the equity in your home — essentially turning some of that built-up value into usable funds. Even with higher rates, this can be a cost-effective way to:
- Consolidate high-interest debt (like credit cards)
- Fund home renovations
- Cover college tuition or medical expenses.
Example: Let’s say you’re carrying $30,000 in credit card debt at 22% interest. Even if mortgage rates are at 7%, rolling that debt into a fixed, lower-rate loan could save you thousands in interest and simplify your payments.
2. You Want to Switch Loan Types
Refinancing isn’t always about chasing lower rates. It might be about:
- Switching from an adjustable-rate mortgage (ARM) to a fixed-rate loan to lock in a predictable payment before rates climb further.
- Getting out of FHA loan mortgage insurance (MIP) by refinancing into a conventional loan with at least 20% equity.
- Eliminating PMI (private mortgage insurance) once your home has appreciated enough in value.
3. You Need to Restructure Your Loan Term
If you’re in a stronger financial position now, you may want to refinance from a 30-year to a 15-year loan to pay off your mortgage faster — even if the rate is slightly higher. This move builds equity quicker and reduces total interest paid over time.
Alternatively, refinancing to extend your term could reduce your monthly payment and offer breathing room during tight times — even if it increases total interest over the life of the loan.
4. Your Credit Has Improved
If your credit score has significantly improved since you first got your mortgage, you may now qualify for a better rate — even if the general market has risen.
Example: Let’s say you originally qualified at 6.5% with a 640 credit score. Now, with a 740+ score, you might refinance at 6.25% despite higher rates overall. Even a small rate drop matters on a large loan.
When Refinancing Might Not Be Worth It
While there are good reasons to refinance in a rising-rate environment, it’s not right for everyone. Consider holding off if:
1. You’re Moving Soon
Refinancing comes with upfront costs — typically 2% to 5% of the loan amount. If you plan to sell or move within a couple of years, you may not stay in the home long enough to break even.
2. Your New Rate Would Be Higher
If you already have a lower interest rate locked in from previous years, refinancing could actually raise your monthly payments. You’d need a compelling reason — like debt consolidation or loan type change — to justify the added cost.
3. Your Loan Is Nearly Paid Off
If you’re well into your amortization schedule (say, year 24 of a 30-year loan), refinancing restarts the clock on your interest payments. Even with a similar rate, this could cost you more in the long run.
4. You Can Achieve the Same Goal Another Way
For example, if your main goal is to pay off your home sooner, you could simply make extra principal payments each month instead of refinancing to a shorter term. This strategy saves on interest and avoids refinance fees.
How to Know If Refinancing Is Worth It
Here’s how to evaluate whether refinancing in today’s market makes sense for your situation:
✔️ Calculate Your Break-Even Point
This is how long it takes for your savings from refinancing to outweigh the upfront costs.
Formula:
Break-even point = Total closing costs ÷ Monthly savings
Example:
- Closing costs: $5,000
- Monthly savings: $150
- Break-even point = 33 months (~2 years and 9 months).
If you plan to stay longer than 33 months, refinancing could be worth it.
✔️ Use a Refinance Calculator
Tools like a mortgage refinance calculator can quickly show you how your new loan compares with your current one — including interest savings over time.
You can also talk to a mortgage expert at DSLD Mortgage to run real scenarios based on your home, credit profile, and goals.
Strategies for Refinancing in a Rising-Rate Market
If you decide refinancing still makes sense for you, here are some tips to get the best deal:
1. Improve Your Credit Score
Lenders reserve the best rates for borrowers with excellent credit. Pay down debts, avoid new credit inquiries, and correct any errors on your credit report.
2. Shop Around
Different lenders offer different rates and fee structures. Don’t settle for the first offer — get quotes from at least 3–5 lenders to compare.
3. Negotiate Closing Costs
Some fees are negotiable, especially lender fees and title charges. Ask for a breakdown and see where you can save.
4. Consider a No-Closing-Cost Refinance
This type of loan rolls your closing costs into the mortgage balance or interest rate. It can be helpful if you don’t have a lot of cash on hand, but make sure the higher rate doesn’t outweigh the savings.
Final Thoughts
Rising interest rates don’t automatically mean refinancing is off the table. In fact, it can still be a smart move, depending on your goals — especially if you want to consolidate debt, change loan terms, or tap into home equity.
The key is to run the numbers carefully, understand the costs and benefits, and explore all your options. A knowledgeable mortgage professional can help you evaluate whether a refinance fits into your financial plan — or if it’s better to wait.
