Does It Make Sense For Me To Refinance To a Higher Interest Rate?  My Variable Consumer Debt Payments are Soaring.  What Should I Do?

Hello Greg,

I need some good advice.  My partner and I are having a constructive debate about how we should tackle our growing consumer debt.  She wants to refinance the mortgage to take cash output to pay off debt and reduce our total monthly payments.  I would like to keep our mortgage as is and chip away at our debt each month.

The main reason that I do not want to touch our current mortgage is that we refinanced to a very low rate in 2021.  At that time, we refinance the balance of our mortgage down to 3.125%.  Previously our interest rate was 3.99%We plan is to stay in our home for at least 15 years.  At that point we plan is to retire, out of state, and retire.

Needless to say, when we refinanced to that super low rate of 3.125% in 2021, I was convinced that we were set with the lowest possible mortgage rate.  Oh, I forgot to mention that the mortgage is an i30-year year fixed so we are about 1 year into the term.

I feel that we have been able to pay slightly above the minimum payment each month on our accounts.  The balances are moving down slowly – but they are moving down.  I just can’t wrap my head around moving to a higher mortgage partner’s

My partners stance is that a low mortgage rate is fantastic, but our total monthly payment is much more important.  She is convinced that credit card rates and personal loan rates are going to continue to move up for the foreseeable future.  In her considered opinion, our credit card payments will continue to rise every few months.  By slowly paying the balance down, we will just fall further behind as rates continue to rise.

I guess the best way to help decide is to look at the actual numbers – here they are:  Our mortgage balance is $328,000.  The mortgage amount we took out last year was $335,000.  We have not paid anadditionalditonal toward our principal balance over the past year.  Any extra funds that we had went toward our credit card balances.

The monthly principal and interest payment on the mortgage is $1,435.  I won’t consider the escrow payment since that will remain the same regardless of whether we refinance or not.  When we did our refinance in 2021 our home appraised for $492,000.

Given the historic property value increases over the past 12 – 18 months, I am estimating that the current value is in the $530,000 range.  I am being conservative here as a couple of my neighbor’s homes have just recently sold for $550,000+.

Here are the debts we would like to pay off – first, our toy loan.  Ok, it is a boat and yes it is a toy but I love it!  The balance is $34,000 and our monthly payment is $335.  We also have $30,000 in credit card debt.  Conservatively, we pay $775 per month on these accounts.  There are months when we pay a little more toward the credit card debt but are not always able to do so.  We also have a personal loan with a $7,000 balance with a $225 monthly payment.

In addition to paying off the debt, there are some home improvements that we would like to make if possible.  If we could get $10,000 extra for the home improvements that would be fantastic.

Let me know your thoughts.  Thanks!

Doug Ritter

Well, Doug, there is no easy way to say this but… you are wrong and your partner is right.  The great news is that you don’t need to take my word or your partner’s word for it. All you need to do is look at the numbers.  They speak for themselves.

I will tell you that you are not alone in your feeling about not wanting to change out a historically low mortgage rate.  Millions of people who purchased or refinanced a mortgage in the last two years are in a similar boat.  Although your current rate is low, it is more important to focus on what your money is doing for you.

I always say that a mortgage is the greatest financial tool that most people have in their arsenal.  Regardless of whether mortgage rates are in the low 3’s, mid 4’s, 6’s, or 7.5%+ relative to other loan rates – it is almost always the cheapest money available.

Also, did you know that the ‘cash-out’ portion of the loan is tax-free?  That means that you are not paying income taxes on your cash back.  You would need to earn about $95,000 in taxable income to equal $60,000 cashback in your pocket.  In that perspective, interest rate seems much less important.

As they say, though, the proof is in the pudding.  Let’s look at what you are paying now:

mortgage principal & interest          $1,435

credit card payments                         $    775

boat payment                                      $     335

personal loan                                      $      225

total                                                       $  2,770

With an estimated current 30-year fixed mortgage APR at 5.75% your new monthly mortgage principal and interest payment would be approximately $2,190.

The refinance at current market rates would reduce your total monthly payment by $550+.  In addition, you receive $10,000 for your home improvements.  Did you know that in your mortgage refinance scenario if you were to pay the $550 monthly savings toward principal each month the new mortgage would be paid off in just under 20 years!

The refinance is a win all around.  I think the debate is settled!  What are your thoughts?

Greg Rutolo