Image Source: Getty Images
In mid-2020, as mortgage rates began to plummet to record lows, many homeowners rushed to refinance so they could lower their house payments. But mortgage refinancing activity has slowed a lot in 2022, and for good reason.
Since the beginning of the year, mortgage rates have risen sharply. And at this point, many homeowners are looking for higher rates when refinancing than what they are paying now on their mortgages.
As such, it is fair to assume that refinancing no make sense to many homeowners in 2023, at least for the first part of the year. But is cash-out refinancing a different story?
Should you plan a cash-out refinance?
With a regular refinance, you trade in your existing mortgage for a new one with the same balance. With a cash-out refinance, you borrow more than the balance of your existing home loan so you have access to an amount of cash that you can spend however you like. So if, for example, you owe $200,000 on a mortgage, you can do a $250,000 cash-out refinance.
Now, it’s almost never a good idea to refinance with cash out so you can plan a vacation or spend money on things that only bring you temporary enjoyment. But it’s much more reasonable to do a cash-out refinance so you can renovate your home or tackle key repairs.
More: Check out our picks for the best mortgage lenders
Just to be clear, you can use the proceeds from a cash-out refinance for any purpose. It does not have to be related to the home. And as long as you borrow for the right reasons, a cash-out refinance could it makes sense simply because it may be among the most cost-effective options you’ll find.
Right now, it’s not just mortgage rates that are higher than they have been in a long time. Rather, virtually all interest rates on consumer loans have gone up. So whether you’re getting a car loan, a personal loan, or a home equity loan, you’re probably thinking about spending more. The benefit of a cash-out refinance is that you can have more flexibility because it’s a secured loan—it’s backed by the equity you have in your home.
Another option to look at
A major disadvantage of doing a cash-out refinance is that you may only need to access a smaller amount of cash, but you are forced to refinance your entire mortgage. So before you go down that road, you may want to consider a home equity loan.
Let’s say you need a $50,000 loan for a home renovation project and you owe $200,000 on your mortgage. Instead of potentially being subjected to a higher-than-average interest rate on $250,000 when you do a cash-out refinance, you could get a $50,000 home equity loan.
In fact, a cash-out refinance only makes more sense than a home equity loan in early 2023 if you already have a high interest rate on your mortgage. If not, then a home equity loan is probably your best option since it is less expensive overall.
Our picks for the best credit cards
Our experts sifted through the most popular deals to land you on the curated picks that deserve a spot in your wallet. These best-in-class cards include great perks like great sign-up bonuses, long 0% introductory APR offers, and solid rewards. Get started today with our recommended credit cards.
We strongly believe in the golden rule that editorial opinions are ours alone and have not been previously reviewed, approved or endorsed by the advertisers included. The Ascent doesn’t cover every offering on the market. Editorial content for The Ascent is separate from editorial content for The Motley Fool and is created by a separate team of analysts. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Not all news on the site expresses the point of view of the site, but we transmit this news automatically and translate it through programmatic technology on the site and not from a human editor.