The financial turmoil sparked by the coronavirus outbreak has one upside for homeowners: Cash-out refinancings are spiking along with overall refinancings, as borrowers rush to take advantage of mortgage rates that are down significantly from a year ago.
The practice, known as a cash-out refinance, allows owners to take advantage of their home’s appreciation and borrow against the greater value, pocketing the additional cash. In March, mortgage applications more than doubled what they were last year.*
With mortgage rates remaining below 4 percent, cash-out refinancing may remain an attractive option for borrowers for quite some time.
Should borrowers use a cash-out refinance?
If you do proceed with a cash-out refinance, it’s important to understand when it’s the right option. One big advantage, of course, is being able to access more cash at a lower rate. But the key is how you spend that cash. It may make sense for home improvements or paying off high-interest debt, but it’s not a good idea to use those funds for everyday spending.
Of course, any increased monthly payment also entails further risks, so it’s important to balance the risk against the need for cash.
Even if you don’t opt for a cash-out refinance, you could also lower your term to a 20 or 15 year loan which could potentially save you thousands of dollars over the life of the loan.
Alternatives to a cash-out refi
There are other options you should consider before you start comparing rates on a cash-out refi, including:
- Home equity line of credit, or HELOC: allows you to borrow money when need to with a revolving line of credit, similar to a credit card. This can be useful if you need money over a few years for a renovation project spread out over time. A HELOC interest rate is variable and changes with the prime rate.
- Home equity loan: A home equity loanis a second mortgage that gives you a lump sum amount and the interest rate is fixed, which helps homeowners budget for another monthly payment.
- Reverse mortgage: A reverse mortgageallows homeowners age 62 and up to withdraw cash from their homes and the balance does not have to be repaid as long as the borrower lives in the home and pays their property taxes and homeowners insurance.
Bottom line
Crunch the numbers carefully to ensure that a cash-out refinance is the right avenue for your financial needs. Remember that you’re putting your house on the line as collateral, which means you could lose it if you fail to repay the new mortgage. Tapping your home equity isn’t a decision to make lightly, but doing so can offer you a strategic way to improve your overall financial picture if done with care. If you are ready to take the next steps, contact one of our loan specialist to help you meet your goals.
*bankrate.com
