Interest Rates Too High For Refinancing? Here’s What You Can Do

Refinancing your mortgage has traditionally been a powerful financial tool to help you accomplish two goals: lowering your monthly payments, and giving you a bundle of cash to cover a big expense. But when current mortgage interest rates soar above where rates were when you first took out your loan, refinancing will likely lose you money. But if your monthly mortgage bill has become unaffordable or you need a lot of money quickly, homeowners still have options that won’t chain you to a higher rate.

Below, CNBC Select explains how you can tell when refinancing is a bad choice — and what you can do instead.

What you can do instead of refinancing

When refinancing might not make sense

One reason people refinance their mortgages is to save money. This is possible when you can get a rate lower than your original mortgage’s, which means you’ll pay less in interest every month. Refinancing also gives you an opportunity to shorten your payoff term and potentially get rid of private mortgage insurance (PMI), which can ease the financial burden of homeownership.

However, you’re not likely to save anything if you’re refinancing during a high-interest environment. For instance, if you have a 4.5% interest rate on your mortgage loan and the average refinance APR is 8%, you’ll actually be switching to a much more expensive mortgage.

Another popular reason to refinance your home is to turn some of the equity you have into cash via a cash-out refinance. For example, if you had $60,000 worth of equity on a home you purchased with a mortgage for $300,000, you could convert a portion of that $60,000 into cash (and that same amount would be added to the principal of the mortgage loan).

Here again, high interest rates make refinancing unappealing. Because a cash-out refinance is technically replacing your current mortgage with a new one, that means dealing with the current interest rate environment — and when rates are high, that means paying more in interest than you did before.

Still, that doesn’t mean you’re out of options whether you’re trying to lower your monthly payment or get access to cash. You might be able to find alternative solutions, some of which have nothing to do with your mortgage loan itself.

How to lower your mortgage payment without refinancing

They say, “Marry the house, date the rate.” But when the rates refuse to come down, you might have to just live with your current interest payments and look for other ways to lower your monthly payment.

The ways you can lower your mortgage payment include:

  • Get rid of PMI. If you have a conventional mortgage, your lender will automatically cancel PMI when you reach 22% equity. Or, you might be able to request cancellation yourself once your equity is 20%.
  • Recast your mortgage. If your lender offers this service, you can make a large payment toward the principal balance. The lender will then re-amortize your loan: the terms will remain the same, but the lower balance will result in lower monthly payments and a decrease in the amount you’ll pay in interest over time.
  • Switch your home insurance. Do some comparison shopping and see if you can qualify for lower premiums. CNBC Select recommends Nationwide as the best overall cheap homeowners insurance — especially if you can bundle it with other insurance types.

Nationwide Homeowners Insurance

  • Cost

    The best way to estimate your costs is to request a quote

  • Maximum coverage

  • App available

  • Policy highlights

    Policy covers home and property damages caused by theft, fire and weather damage. It also covers personal liability, loss of use and unauthorized transactions on your credit card

  • Does not cover

    Water damage, earthquakes, flood insurance, identity theft, high-value items, rebuilding home after loss (these can all be purchased as add-ons for extra coverage)

  • Request mortgage forbearance or a loan modification. If you’re dealing with financial hardship, forbearance can reduce or pause your mortgage payments for an agreed period — but you’ll need to repay all the late or suspended payments afterward. Another option is to ask for a loan modification program that changes the terms of your mortgage permanently to help you avoid foreclosure.

What to do instead of cash-out refinancing

If you need access to a large sum of money and your savings accounts fail to help you, tapping into your mortgage might seem like an appealing solution — unless interest rates make that idea cost-prohibitive.

Luckily, there’s a more flexible way to access your equity. With a home equity line of credit (HELOC), you can draw from your equity up to a specified limit and repay the money back in monthly payments. You’ll pay an APR on the borrowed amount, but even in a high-interest environment, it will be lower than on credit cards.

Typically, you get 10 years to withdraw cash while only paying interest and 20 more years to repay both principal and interest. The interest rate tends to be variable, so there’s a chance it will decrease even if you’re borrowing when rates are high. Meanwhile, your mortgage terms remain the same — you’ll just have an additional monthly payment.

Finally, remember that you likely have other ways to borrow money that don’t involve your home. If your credit is in great shape, you may qualify for a low interest rate on a personal loan. For example, as of writing, you could qualify for a personal loan from Upstart with an APR as low as 6.4% and borrow up to $50,000. If you need more money, LightStream offers loans of up to $100,000 with APRs starting at 7.99% if you enroll in autopay. And since most personal loans are unsecured, you won’t be putting your home on the line.

Upstart Personal Loans

  • Annual Percentage Rate (APR)

  • Loan purpose

    Debt consolidation, credit card refinancing, wedding, moving or medical

  • Loan amounts

  • Terms

  • Credit needed

    FICO or Vantage score of 600 (but will accept applicants whose credit history is so insufficient they don’t have a credit score)

  • Origination fee

    0% to 12% of the target amount

  • Early payoff penalty

  • Late fee

    The greater of 5% of monthly past due amount or $15

LightStream Personal Loans

  • Annual Percentage Rate (APR)

    7.99% – 25.99%* APR with AutoPay

  • Loan purpose

    Debt consolidation, home improvement, auto financing, medical expenses, and others

  • Loan amounts

  • Terms

    24 to 144 months* dependent on loan purpose

  • Credit needed

  • Origination fee

  • Early payoff penalty

  • Late fee

Terms apply. *AutoPay discount is only available prior to loan funding. Rates without AutoPay are 0.50% points higher. Excellent credit required for lowest rate. Rates vary by loan purpose.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

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