There’s a reason homeowners rushed to refinance their mortgages from mid-2020 through the end of 2021. During that time, mortgage rates dropped to extremely competitive levels, and that inspired a lot of people to go out and reap savings by swapping their existing home loans for new ones.
But over the past six months, mortgage rates have risen at a rapid clip. And now, it’s more expensive to take out a mortgage than it’s been in years.
As such, it generally does not make sense for homeowners to refinance a mortgage today. But there’s one exception to that rule, and it may apply to you.
When we think about refinancing, we might imagine a typical refinance, where you swap a loan with a $240,000 balance for a new one with that very same balance. But there’s another type of refinancing some homeowners might be interested in that could make sense today, despite higher borrowing rates.
It’s called a cash-out refinance, and it’s a move that makes sense for homeowners who have a lot of equity in their properties. And these days, that’s the case across the nation.
Because home values have soared over the past two years, many property owners are sitting on record levels of home equity. That’s equity some may want to tap by borrowing against their homes.
Now, if you want to go that route, you have different options. You could apply for a home equity loan or line of credit (HELOC), which won’t take the place of your mortgage. Or, you could do a cash-out refinance, where you swap your existing mortgage for a new one with a higher loan balance.
So, say you owe $240,000 on your mortgage but you want to borrow $60,000 against your home equity to finance a series of planned renovations. With a cash-out refinance, you’d take out a new mortgage for $300,000. The first $240,000 would be used to pay off your existing loan, and the remaining $60,000 would go to you in check form.
If you refinance your mortgage today, you may not end up with the best borrowing rate. But the interest rate you snag on a cash-out refinance may be more favorable than the interest rate you’ll get on a home equity loan or HELOC. And if you’re eager to tap your home equity while it’s high, then a cash-out refinance could make sense.
However, if you’re thinking of doing a regular refinance, that’s another story. It may be that your credit score has improved so much since signing your original mortgage that you’ll snag a lower rate today than you did when you first got that loan. But otherwise, borrowing rates are quite high today compared to where they’ve sat over the past number of years. And for that reason, it generally pays to put off a regular refinance right now and wait for rates to come down.
This article was written by Maurie Backman from The Motley Fool and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to email@example.com.