Refinancing to a Higher Interest Rate Can Save Money.
Yes, surprisingly, refinancing a mortgage to a higher interest can actually be a wise financial move when high interest debts are being consolidated into the new loan. The key is to step back and look at the overall interest rate you are paying on your entire debt load, not just the mortgage. This is called the blended interest rate.
Understanding blended interest rates.
A blended interest rate is an interest rate that is figured on a combination of debts, i.e. auto loans, credit cards, house, etc. Since it is not averaged but in fact figured on each individual debt this gives a truer picture to the cost of borrowing money. The interest rate for numerous debts is compiled into one simple number thereby making it easier to understand. Using a debt consoldiation calculator can make it simpler to decide whether or not to consolidate debts into a new loan.
You simply take the total of each loan and divide it by the entire balance. Next multiply each of the loans’ interest rates to get an individual weighted interest rate. Then these are added in order to get the blended interest rate to tell you if you should combine these into a new loan.
How can refinancing to a higher interest rate save you money?
In past years the trend has been to refinance to a lower interest rate which common sense dictates is a smart financial move. However, refinancing to a higher rate can save money in certain situations. Comparing your blended interest rate before to a proposed interest rate is one essential ingredient to making a sound financial decision.
Consolidating debt into a single loan can lower interest paid.
A debt consoldiation calculator comes in handy for this. When you consolidate your multiple debts into one loan you can lower monthly payments even if the cost of the mortgage increases. It can also lower the overall cost of borrowing money on your entire debt load. This savings can then be applied to reducing the principal balance of the mortgage, in turn paying it off sooner and reducing the interest paid even more.
Credit cards and car loans can be added in order to get out of a financial bind. Consolidating debts can come in handy especially in times when money is tight and you need to save every dollar you can.
It is important to always check your blended interest rate when refinancing in order to consolidate debts. The use of a debt consolidation calculator will help to determine whether or not a blended interest rate or refinancing at a higher interest rate is more beneficial to you.
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