Real Estate

When Does a Cash-Out Refinance Still Make Sense in Today’s Market?

Over the last two years, we have experienced record low mortgage rates.  This led to a “refi boom” where just about everyone who could, was refinancing their current home loan from rates in the 4’s and 5’s (and some even higher) to rates in the 2’s and 3’s, and in many cases saving hundreds of dollars per month on their payment. It was a great opportunity that a record number of homeowners took advantage of.

Times have changed a bit.  Due to rising inflation, mortgage rates have risen to more than double what they were a year ago.  Refinances are virtually nonexistent in this market, because for many homeowners, it would make no sense to refinance a mortgage and trade a rate in the 2’s for one in the 6’s.  That is unless you could pay off a large amount of debt at a much higher interest rate.

As the Fed continues to raise interest rates to combat inflation, this has a direct impact on credit card interest rates.  More than likely, if you have a credit card, that rate has risen significantly over the last 12 months and you may not have even realized it.  When you couple rising credit card interest rates with the fact that credit card debt across American households is increasing as people have to dip into savings and use credit cards more frequently to combat the price of rising goods, this is recipe for disaster.  Some credit cards can carry interest rates of almost 30%.

If a person has a large amount of credit card debt at those kinds of rates, it is virtually impossible to get that debt paid off.

In this situation, it could potentially be very beneficial for someone to do what’s called a “cash out refinance” and take equity in their home to pay off high balance, high interest rate credit cards. In many situations, even if a person refinances at a higher interest rate on their home than they currently have, if they wipe out the credit card debt, they can still save money and increase their cash flow every month.  Although their house payment may increase slightly, they can eliminate hundreds in monthly credit card payments.

So even though we are in a difficult market, there is still the potential for borrowers to save money every month.  If you think this might be something that could benefit you or your family, reach out to a mortgage professional to discuss options and see what would be best for you.

Josh Moody has decades of experience in residential mortgage lending and is with The Mortgage Center in Cullman, Alabama. He resides in Gardendale and is a contributor to North Jefferson Magazine.