Dear Penny: Does It Ever Make Sense to Refinance at a Higher Interest Rate?

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Dear Penny,

We recently came into some money and would like to pay down some of our mortgage. But we have an FHA loan and the only option would be to refinance. 

Since the rates are higher than ours and expected to rise, should we wait to refinance? I'm totally bummed that the mortgage cannot be recast.

-A.

Dear A.,

Refinancing makes sense when it can save you money over the life of the loan. Or sometimes, it’s a smart move when you have an adjustable-rate mortgage and you want to lock in the certainty of a fixed rate.

But refinancing doesn’t make sense when you have a mortgage that’s lower than current rates. You’d not only be spending more on interest, but you’d also have to pay closing costs. According to Rocket Mortgage, you could expect to pay anywhere from 2% to 6% on your remaining principal.

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For readers who aren’t familiar with the difference between recasting vs. refinancing a mortgage: Recasting allows you to lower your monthly payments by paying a lump sum of money toward your mortgage. It’s the same loan with the same principal, but the lender recalculates your monthly payments based on the reduced principal.

When you refinance, you’re getting an entirely new loan, typically with the goal of lowering your interest rate or switching from an adjustable-rate mortgage to a fixed rate. Unfortunately, government-backed mortgages like FHA loans and VA loans don’t qualify for recasting, which is why as you point out, refinancing is the only option.

You could still make a lump-sum payment and reduce your principal. You wouldn’t reduce your monthly payments, but at least your interest rate wouldn’t go up.

Think about whether this money could be better spent on other financial goals. You could use it to bulk up your emergency fund or pay off other debts. Or you could use the current bear market as an opportunity to invest more. If your finances are in good shape, there’s also nothing wrong with using some of this money on a splurge.

If your goal is to have more money each month, you could still use your windfall to accomplish that. You could keep the money in a high-yield savings account that’s separate from the rest of your money. Then you could set up automatic monthly transfers for the amount you’d hoped to save on refinancing. Obviously, that’s not as satisfying as knocking out a huge chunk of debt, but you’d more or less accomplish the same thing.

Or perhaps nothing is the best thing to do right now. Often, when we get a significant sum of money, our impulse is to decide how to spend it immediately. But sometimes letting it marinate for a while until the right opportunity comes along is the wisest move.

If you have more than $1,000 in your checking account, make these moves.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].