Economic uncertainty abounds right now as inflation surges and the interest rates on all kinds of financial products rise.
Even so, homeowners may find that tapping their home equity through a cash-out refinance is a financially sound decision, despite the fact that doing so is costlier than it would have been a year ago — or even two months ago.
Here’s why a cash-out refi can still make sense, even in this economy.
What’s going on with mortgage refinance rates
It’s no secret that mortgage rates have been rising rapidly. At the beginning of 2022, the average interest on a 30-year fixed mortgage for a purchase was below 3.5 percent. Now, less than six months later, that average has shot up about two full percentage points, hovering around 5.5 percent. While refinance rates are a bit lower than those purchase rates, they’ve followed a similar rising trend.
“It’s a huge increase,” says Joel Kan, associate vice president of economic and industry forecasting at the Mortgage Bankers Association (MBA), adding that it’s led many homeowners to back away from refinancing.
“Refinances are down 70 percent year-over-year,” Kan says. “Coming off of two record refi years, 2020 and 2021, where people got a fixed rate below 3.5 percent, there isn’t really a benefit to refinancing.”
He adds that mortgage rates should settle to an average of 5 percent for 2022 based on current MBA analyses. Even at those higher levels, plenty of homeowners could take advantage of a cheaper mortgage.
“There are still millions of consumers that are in mortgage products where they can lower their interest rates by refinancing,” says Joe Mellman, senior vice president of the mortgage business at TransUnion, though he acknowledges that number is much smaller than it was during the refinancing wave of 2020 and 2021.
“While that 5 percent from a long-term historical perspective is still quite low, it’s significant because it’s up to 60 percent higher than the rates consumers have locked into in their refinance” if they undertook one in the past few years, Mellman says.
Why homeowners could still benefit from a cash-out refinance
For most homeowners, a rate-and-term refinance doesn’t make sense given the current rate environment, but cash-out refis can still be a great option for many.
Tapping your home’s equity can be a good way to consolidate higher-interest debt or fund expensive projects like home repairs.
“Home improvement is another major use of home equity, as many more consumers are working from home, having a renewed interest in investing in their home,” Mellman says. “Home equity is one of the cheapest ways to finance that home improvement.”
Because home prices have …….
Source: https://www.bankrate.com/mortgages/should-you-do-a-cash-out-refinance-now/