The Right Time for a Cash Out Refinance
Home equity values are still sky-high and rates are heading higher. If you’re considering a cash-out refinance, now might be your last opportunity before rates put it out of reach. These are a few reasons why a refinance might make sense.
2021 was a red hot year for real estate, with the average homeowner seeing an 18% year-over-year jump in the value of their home. That’s great news for owners but bad news for renters and prospective buyers. If you’ve been watching your home’s equity rise and have no plan on selling, now might be the perfect time to consider a cash out refinance.
Timber shortages, supply-chain issues and a lack of labor have added to construction time and contributed to low supply. Couple those increases with pent-up buyer demand and other material and component shortages (most notably appliances and HVAC system components due to increased demand in hot-rolled steel), and existing home prices are likely to continue rising for the foreseeable future (although most industry analysts don’t expect a repeat of 2021).
Unfortunately, those climbing prices are set against a backdrop of inflationary fears and anticipation of rate hikes by the Fed. Fortunately for borrowers, choppiness in the equity markets and a slowed jobs recovery will likely delay those rate hikes until later this year. That being said, mortgage rates are already rising ahead of those hikes and have hit their highest levels since April 2020. Average rates this week came in just above 3.6% which means, if you haven’t refinanced yet but are considering it, now might be your last chance for a cash out refinance before rate increases put it out of reach.
Why Consider a Cash Out Refinance?
A cash out refinance is exactly what it sounds like: you use the rising equity in your home to refinance your mortgage with either a new lender or your existing lender. There are many scenarios that make a cash out refinance a smart financial choice, such as:
Lowering your borrowing rates – If you have an existing mortgage at a higher rate than what lenders are currently offering (or are paying PMI but now have more than 20% equity in your home) a cash out refinance can save borrowing costs for years down the line and put a little extra cash in your pocket. Due to origination costs (typically $2,000-$7,000 varying by lender, property and location), the rule of thumb is that a cash out refinance only makes sense if you can save upwards of 0.5%-0.75%. If you can’t save that much on your rate, you probably won’t recoup those costs during the typical life of a loan (the average life of a 30-year mortgage is about seven years due to home sales or refinancings).
Debt consolidation – If you have other outstanding debt at significantly higher rates, such as credit cards, lines of credit, auto loans or even student loans, using a cash out refinance can help improve your overall financial health, even if it doesn’t offer significant savings on your borrowing rates. It’s important not to use the equity in your home as a permission slip to continue accruing high levels of debt, but if this once-in-a-decade real estate market has juiced the equity in your home it does offer the potential of giving you a clean slate on revolving debt.
Putting cash in your pocket (or to work elsewhere) – Oftentimes borrowers will pursue a cash out refinance just to cash out. With rates still near historical lows, converting your home’s equity to cash in your bank account can offer peace of mind and emergency reserves. There are other ways to access the equity, such as a reverse mortgage or home equity loan, as we’ve written about before, but just knowing that the money is in your bank account is a plus. Alternatively, some borrowers choose to use a cash out refinance to raise capital for other investments like a rental property or investment in a business (in most situations it’s not recommended that you use a cash out refinance to raise money to invest in stocks because investment losses shouldn’t leave you homeless).
Cash out refinance options for you will be highly individual and are based on a number of factors such as your home’s equity, your credit history and your relationship with lenders, just to name a few. That being said, the current housing market and a future that will seemingly bring higher rates might make right now the last best time for a cash out refinance.
If you’ve recently refinanced your mortgage, how was the experience?
*This post has been updated from a version originally published in 2021.