Why Cash-Out Refinances are on the Rise
A cash-out refinance is a type of mortgage refinance where the homeowner refinances the mortgage into a larger loan in order to withdraw the difference between the loans in cash. For example, if the homeowner still owes $200,000 on a $300,000 home and would like to withdraw $30,000, they could refinance the mortgage to a value of $230,000. Some of the ways homeowners use cash-out refinances is to pay off credit card debt, send their kids to college, or fund renovations on the home.
When refinancing activity declines overall, cash-out refinances tend to rise. LendingTree reports that cash-out refinances increased to a 62% share of all refinance activity in the first quarter of 2018, up from a 54% share in the fourth quarter of 2017. Certain regions are leading the country in cash-out refinance activity, specifically Albany, NY with 73% of refinance activity, Portland, OR with 72% of refinance activity, and Cape Coral, FL with 72% of refinance activity.
Like any mortgage refinance, the homeowner is going to have to pay closing costs and fees associated with a new loan origination. Long-term, the homeowner will also have to pay interest on the cash they take out with the loan. Depending on the amount of cash taken out and the interest rate of the loan, this could amount to thousands of dollars.
Homeowners can also access home equity through a home equity loan or home equity line of credit. However, these types of loans usually require higher credit scores. In some cases, a cash-out refinance could even carry a lower interest rate than the homeowner’s current mortgage, depending on when they purchased their home.
A cash-out refinance can be a great option for homeowners if they can secure a lower interest rate, will be able to pay back the new loan, and use the cash to pay down other debts or reinvest in the home through home improvement projects. A cash-out refinance is not the best option for every situation. Before pursuing a cash-out refinance, consult a mortgage professional to review all of your options.
Sources: HousingWire, Zillow