Mortgage Rates Dropped 0.04% Last Week. Is Now a Good Time for a Cash-Out Refinance?

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Last week’s average 30-year fixed-rate mortgage rate dropped 0.04%, to 3.13%. Although rates have not been below 3% since February, they are still very close to all-time historic lows, not to mention being 1% lower than pre-pandemic levels

This low rate environment, combined with rising home prices, can be especially beneficial for existing homeowners, allowing them to turn their home equity into cash with a cash-out refinance. Nearly half of all refinances in the second quarter of 2021 were cash-out refinances, according to property data analytics firm Black Knight, up from 37% in the first quarter of the year.

But there are some considerations that may make other refinancing options — or not refinancing at all —  a better fit for you. Here’s how to calculate whether a cash-out refinance makes more sense for your personal financial situation, as well as some alternatives.

Last week’s average mortgage rate is based on mortgage rate information provided by national lenders to Bankrate.com, which like NextAdvisor is owned by Red Ventures.

Cash-Out Versus a Rate-and-Term Refinance

A refinance is when you replace your existing mortgage with a new one. A rate-and-term refinance focuses primarily on changing your interest rate and loan term—allowing you to save money by locking in a lower rate or paying off your loan faster.  A cash-out refinance means taking out a mortgage loan larger than what you owe and pocketing the difference as cash.

A rate-and-term refinance is best suited for those who are looking to change only the rate and/or length of their mortgage. There are typically fewer closing costs for a rate-and-term refinance. You may still be able to get a small amount of cash out on a rate-and-term refinance through a process known as a limited cash-out refinance. You can get cash up to $2,000 or 2% of the loan amount, whichever is less, according to rules set by Fannie Mae. A cash-out refinance allows you to get much more cash in your pocket, which you can then use for things like funding home improvements, consolidating high-interest rate debt, or investing. Cash-out refinances are generally more expensive and come with higher closing costs. The example below shows the hypothetical costs of a rate-and-term refinance and a cash-out refinance for a 30-year loan term with an original loan that was a$270,000 30-year loan at 4.75%.

Assumptions:

• Home value: $300,000 • Maximum cash-out refinance amount (up to 80% of home value):$240,000
• Existing loan balance: $200,000 • Cash-out amount :$40,000

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