Sponsored Content: A cash out refinance lets homeowners turn their hard-earned equity into cash. It’s essentially a new, larger mortgage that replaces the existing mortgage — and the homeowner pockets the extra cash to use for home improvements, emergencies, or other large expenses.
When interest rates were at historic lows, a substantial number of homeowners took advantage of the unique economic circumstances to take out a cash out refinance. Today, economic conditions have changed and mortgage rates are higher.
So, does it still make sense to do a cash out refinance in 2023? If you’re currently considering a mortgage refinance, the answer will depend largely on your unique financial situation.
Here are some of the reasons a cash out refinance might work for you:
Update Your Mortgage Rate and Term
If you are eligible for rates that are lower than when you took out your existing mortgage, a refinance could be a good decision. This could be due to market conditions or because your finances have improved over time, making you eligible for better rate offerings.
When refinancing, you could also update to a longer term that might give you a lower monthly payment or a shorter term that would allow you to pay off your mortgage faster. In both cases, it is important to calculate the total interest costs over the life the new loan. This will help you understand whether you will lose or save money in the long run.
Reinvest in Home Renovations
Home prices were rising fast from 2020-2022 for a few reasons:
1- Low interest rates: This made borrowing cheap, increasing home demand.
2- Exodus from big cities: Many people relocated to places with lower population densities to keep safe from COVID. Increased remote work opportunities also allowed many to relocate to areas with lower living costs. At the same time, people wanted single-family homes with more space for working and living.
3- Limited supply: Many businesses in the housing industry took a hit after the 2008 financial crisis, including home builders. Due to decreased building over the last decade, supply couldn’t possibly meet the pandemic-induced increase in demand.
These factors combined put existing homeowners in a fantastic position because they saw their home equity rise dramatically.
When you have a large amount of equity, you could turn it into money in your pocket to reinvest into home renovations with a cash out refinance. These improvements can often make your home a more enjoyable place to live and to boost its value even more.
Pay Off High-Interest Debts
When accruing high-interest debts from sources such as credit cards or personal loans, you might be able to leverage your home equity to consolidate these debts at a lower rate with a cash out refinance.
Even if current interest rates are higher than on your existing mortgage, you might be able to save money on overall monthly debt payments in this scenario. Make sure to calculate the amount you expect to pay back with interest across all of your loans including you mortgage. You might find that you could potentially save money by refinancing and using your equity to consolidate these into one monthly payment using your home as collateral.
Prepare for Emergencies
When there is an economic downturn, there is an increased risk of job loss and loss of income from potential furloughs and layoffs.
Homeowners are in a better position than renters in these unfortunate circumstances. They could tap into their equity for a significant sum of cash and use it to cover emergencies. The option of a cash out refinance can help you have money set aside for peace of mind in the event of a worst-case scenario.
Cash Out Refinancing: Convert Equity to Cash
Cash out refinancing offers an opportunity to refinance your existing mortgage and borrow funds from your home equity at the same time. It can let you take advantage of rising housing market prices and access equity for home renovations, upgrades, and emergencies.
Although interest rates are rising, refinancing may still be a good idea. However, if you want to keep your current rate and still tap into your equity, there are alternatives such as home equity loans or home equity lines of credit (HELOC).
That said, all homeowners should weigh the benefits of any refinance or home equity loan against its costs before moving forward with an application.
Please note: Discover® Home Loans offers mortgage refinance and home equity loan products, but does not offer HELOCs.
About Discover Home Loans
Discover Home Loans provides home equity loans and mortgage refinance options with a range of benefits for qualified homeowners. Find options that fit within your budget at discover.com/home-loans. © 2023 Discover Bank, Member FDIC | NMLS ID 684042