Mortgage rates have risen. Would a cash-out refinance still make sense?

In fact, mortgage rates have fallen in recent weeks compared to last fall. In fact, as of this writing, the average interest rate for a 30-year mortgage according to Freddie Mac is 6.95%.

However, although mortgage lenders have recently lowered interest rates, loans are still quite expensive for homebuyers. It can also be an expensive time to refinance your mortgage.

However, there is a special type of refinance called a cash-out refinance that still makes sense today despite higher borrowing costs. And if certain circumstances apply to you, you may eventually want to refinance your mortgage.

There has to be a good reason

A cash-out refinance allows you to borrow more than the remaining mortgage balance while replacing your existing home loan with a new one. Let’s say you owe $150,000 on your mortgage, but your house is worth $300,000. If you need to borrow $50,000, you can refinance $200,000 into cash. Here, you can use the first $150,000 to pay off your original mortgage and use the remaining $50,000 as you wish.

It’s generally best to refinance for cash when mortgage rates are low. Not so today. However, under the right circumstances, taking cash out of your home can still pay for itself.

Let’s say you’ve purchased a home and your family is growing and you desperately need additional living space. If you’re waiting for your basement to be completed and need money to fix it, this may be a good reason to do a cash-out refinance even if you don’t get the best borrowing rate on the deal. Such upgrades can greatly improve your day-to-day quality of life.

If you have a lot of high-interest debt to pay off, you may want to consider a cash-out refinance today. Going back to our example, let’s say you have $50,000 in credit card debt and are paying 20% ​​interest on that debt. If you can do a cash-out refinance at 7%, you can drastically lower the interest rate on that debt.

Of course, you need to consider the fact that the interest rate on your remaining mortgage balance may increase. But let’s say you’re paying 5% on your mortgage right now. Raising your interest rate to 7% may make financial sense if it helps you consolidate your credit card debt.

And remember, you can refinance at any time. So if you cash out today and interest rates drop in three years, you could potentially be back at a 5% interest rate. This will help you avoid accruing 20% ​​interest on large credit card balances.

Make sure your credit score is good

For many homeowners, cash-out refinancing doesn’t make sense given current interest rate levels. But if any of the above scenarios apply to you, taking cash out of your home could pay off.

That said, if you want to get the best interest rate on a cash-out refinance, make sure you come in with strong credit. And if your credit score could use some help, do your best to improve it before applying for a new mortgage. You can improve your credit score by paying all your bills on time and correcting errors on your credit report.

Paying off credit card debt may also improve your credit score. However, if you are considering a cash-out refinance for the express purpose of dealing with credit card debt, this may not be a very good option.