With mortgage rates staying at or below 3% for an 8th straight week, homeowners looking to refinance still have good options on the table.
These historic low mortgage interest rates, combined with a steady stream of would-be homebuyers and low housing inventory, have caused home prices to skyrocket. So while finding a good deal on a home can be a big challenge right now, current homeowners are seeing big gains in their home’s equity. The average borrower gained over $33,000 in equity in the first quarter of 2021, according to real estate data analytics firm CoreLogic.
That means homeowners who haven’t already refinanced recently have good options. You could refinance for a more favorable interest rate or repayment term, or you could tap into your home’s equity with a cash-out refinance. Here’s a quick look at what to consider with each option.
How to Decide If Refinancing Now Makes Sense for You
If you’re looking to refinance into a new loan with a lower interest rate or a shorter repayment period, the decision is a bit more straightforward. It mostly boils down to being sure you’ll be in the house long enough for the savings to outweigh the upfront closing costs — which typically range from 3-6% of the new total loan amount.
But if you’d like to turn some of your home’s new equity into cash, then the decision is more nuanced. “When it comes to [doing a cash-out refinance] you have to think about, ‘what am I going to do with that money and how much is it costing me,’” says Mitch Ohlbaum, president of Macoy Capital Partners, a real estate lender.
A cash-out refinance can be a good way to consolidate other high-interest debt into one payment at a low interest rate. Paying off credit card debt or private high-interest student loans with a cash-out refinance can be a good move. “Can I trade $10,000 in credit card debt for $10,000 in cash out of my house? Absolutely … that’s a good trade,” Ohlbaum says. You just need to be sure that what you are saving will eventually outweigh refinancing fees.
Other common uses for a cash-out refinance include tapping into equity to pay for home renovation and other repairs, or even paying for a child’s college tuition. While these can all be good reasons to tap into your home equity with a cash-out refinance, experts recommend homeowners not use home equity for personal expenses like paying for vacation, cars, or weddings.
Another option could be making your home’s equity available for emergencies, which Ohlbaum says can be done by opening a home equity line of credit (HELOC). With a cash-out refinance, you’ll pay thousands of dollars upfront. But a line of credit typically doesn’t have any upfront fees and you won’t pay any interest until — and unless — you use it.
Similar to a cash-out refinance, a HELOC or home equity loan can also be used to pay for home repairs or renovations, as well as college tuition.
What Does This Mean Looking Forward?
Mortgage and refinance rates have hovered between 2.73% and 3.18% since mid-January, with no signs of big movement outside that range anytime soon. “There’s no telling what’s the next big mover in the market … but I believe, after my 20 years experience, that we’re probably going to see these rates continue for some time,” says Mark W. Streeper, vice president and senior lending officer with Stifel Bank & Trust.
Even if we see slightly higher rates by the end of 2021, as some experts forecast, mortgage rates will still be historically low. “If you look back … I’ve seen rates as high as 9%,” Streeper says. So we could have a significant jump in rates, and still have low rates compared to mortgage rate history.
Correction: An earlier version of this story incorrectly stated mortgage rates stayed “under 3% for an 8th straight week.” Mortgage rates were under 3% for 7 of the previous 8 weeks and at 3% once, according to Freddie Mac’s weekly survey. The story has been updated to reflect this.