We’ve written about a cash-out refinance being a great way to boost your finances. Skyrocketing home values made it possible for a lot of people to take out their equity through another mortgage. Not only were home prices high, interest rates were historically low in 2021.
But interest rates have risen dramatically. The national average 30-year fixed mortgage rate has gone from 3.11% at the end of 2021 to 4.72% at the time of writing.
So, is it too late to do a cash-out refinance?
Check your current rate
The first thing to do is to check the rate on your current mortgage. Most people refinance to get a lower rate. Though refinancing to a higher rate isn’t unheard of, it is less common.
Because a refinance replaces your existing mortgage with a brand new one, you will lose out on whatever rate you previously had. However, it can still work out in your favor depending on your objectives.
Would you use the equity to get rid of high interest rate, high balance debt? Is there an investment opportunity that would potentially yield a higher rate of return than the interest owed on the new mortgage? These are situations that could make a refinance beneficial, even with a higher rate.
Some people might not have refinanced in the past few years. If this is you and your rate isn’t that much different than current rates, a cash-out refinance might be appealing. Why? You have likely built a lot of equity over the past few years. And, while rates are higher than last year, they are still low by historical measures.
Research alternative options
The second thing to do is research your alternative options. If you are trying to get cash, a mortgage refinance isn’t the only choice. You can also explore home equity loans. Unlike a refinance, a home equity loan allows you to keep your current mortgage while getting a second, separate loan.
Say you have a $400,000 mortgage and could use $50,000 for some house projects. A refinance means the entire amount of your new mortgage (all $450,000) would now be at a higher rate.
Just remember, a home equity loan is a second mortgage. This means your $400,000 mortgage will be untouched. Only the $50,000 would be charged the higher interest rate.
A common type of home equity loan is a Home Equity Line of Credit (HELOC). The benefit of a HELOC is a line of credit that you can take from when needed. This is especially useful if you are doing some upgrades to your house and you’re not sure what your final budget will be.
Work with a mortgage advisor
The last step is to work with a mortgage advisor to decide which option is best for you. Your advisor can easily run numbers so you can see what your costs, interest, and payment will be for both options.
Just recently, I finished up the process for a Home Equity Line of Credit. Since I already did a refinance last year at a low rate, I decided a HELOC would be best for the cash that I needed for my house projects.
Because it’s a line of credit, I have a 10-year “draw period”. I can make advances from the credit line anytime during these first 10 years. My required repayment is interest only during this time. After the draw period, any remaining loan amount will convert into a fixed repayment schedule.
While I’m glad I got the HELOC, your decision should depend on your cash needs, your monthly income available to pay the loan, and whether you can tolerate the variable nature of the interest rate.
While cash-out refinances aren’t as popular now, you haven’t missed the opportunity to get equity from your home. Talk with one of our mortgage advisors to see what options you have.