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Housing experts’ forecasts are coming true: mortgage rates are going up in 2022, having just hit their highest peak since March 2020. Homeowners interested in cashing out their home equity through a cash-out refinance might be tempted to move quickly — before rates rise even more.
While just months ago it seemed like the ideal time to refinance your mortgage, the upward trend of interest rates indicates you should probably crunch numbers more carefully in 2022. Otherwise, you might not break even on your refinance and pay more over the lifetime of your mortgage than you’d like.
Home valuations are still high, so in that sense, it’s still a somewhat favorable time to tap into your increased home equity with a cash-out refinance. But on the other hand, refinancing activity has slowed by 7%, according to a recent Mortgage Bankers Association (MBA) report, suggesting that rising interest rates have already begun to disincentivize refinancing applications.
Like all real estate transactions, cash-out refinancing is all about timing. Recent trends suggest the ideal refinancing window is coming to a close. However, every situation is unique. Despite the recent interest rate increases, mortgage rates are still near historic lows. In other words, it’s all relative.
Let’s have a look at your cash-out refinancing options and explore the pros and cons of doing a cash-out refinance in today’s market.
How Does a Cash-Out Refinance Work?
A cash-out refinance is a tool that allows you to extract cash value from your home equity. Like a rate-and-term refinance, you take out a new mortgage and use it to pay off your old one. The difference is, your new mortgage will be for a larger amount than what you originally owed, thus reducing your equity in your home but letting you pocket the difference as cash.
Home equity represents how much of your home you actually own, and is calculated by dividing your current mortgage balance by your home’s market value. You can gain home equity in two ways: when your mortgage balance goes down as you make payments, or when your home’s market value rises due to market conditions. Right now, with high demand and low inventory driving home prices up nationwide, many homeowners have found themselves with increased home equity without needing to do anything.
“If you have established equity, it’s like a savings account you’ve established,” says Vicki …….