You may have heard in the news that real estate values are on the rise across the country. In fact, you may have noticed it right in your neighborhood! Chances are, the value of your home is on the rise, and even if you don’t plan on moving any time soon, it could still mean you’re sitting on a little extra cash — if you need the funds.
So what are your options? There are a couple, but which is the right choice for you?
You’ve no doubt heard of refinancing your mortgage, which is often a good option when you want to capture a better rate, lower your payment, or change the terms — if you refinance at the right time. A cash-out mortgage is just another form of a mortgage refinance.
When you refinance with a cash-out mortgage, it allows you to acquire some of the equity in your home by replacing your existing mortgage with a new one. The new mortgage will have a larger amount owed, and then the difference between your existing mortgage amount and the new mortgage is paid to you — or “cashed out” — in cash.
This type of refinancing might seem enticing on the surface. If you have a one-time expense such as a home repair, debt consolidation, or college tuition bill, the extra cash can make a big difference. However, because you’re refinancing your mortgage, you will be losing your existing rate in exchange for a new one — and these days — a higher one.
Refinancing is not to be taken lightly. If you choose to do so, it’s always good to make sure that the pros outweigh the cons; that is, will the savings outweigh the fees. Fees associated with refinancing can be expensive, with closing fees ranging from 2% to 3% of the refinance value. This can mean that even if you are getting a lower rate, you still might not even break even. So as rates continue to increase, a higher-rate mortgage could cost you thousands more.
Right now, while real estate is seeing a significant uptick in value all over the country, we’re also seeing a rise in interest rates. So while a cash-out mortgage might get some extra cash in your pocket, you may end up paying much more in the long run. And if your payment goes up with your rate, you could be suffering the consequences right away.
Home Equity Loans
A better option in today’s rising rate environment is a home equity loan. With a home equity loan you can still cash in on your home’s equity without refinancing your mortgage.
The difference? For starters, it doesn’t affect your rate or payment on your mortgage because it’s an entirely different loan. Rather than refinancing your existing loan, a home equity loan is based on the equity you’ve built up in your home. This equity is used as collateral for a new loan, which is paid out to you as a lump sum for some specific expense. Because it’s a separate loan, you won’t have to worry about losing out on your low rate or monthly payment on your mortgage.
You may be wary about a home equity loan because it’s just that — an additional loan. You’re already paying your mortgage, so a cash out might seem like the better option since you’ll have the cash in hand and still just one loan. However, a home equity loan might be a better option. It typically has a shorter-term and you’ll pay off that cash-out loan faster, possibly saving a significant amount on interest you’d otherwise pay. What’s more, while it’s true you’ll have two payments, this will rebuild your equity faster than have just one longer-term mortgage.
Right now, mortgage rates are high and we can only expect them to go up. If you choose a home equity loan over a cash-out, not only will you not lose out on a possibly much lower mortgage rate by not having to refinance, but it generally will also have a fixed rate . So, while mortgage rates continue to change — and potentially will far surpass the interest rate on home equity loans — your home equity rate will stay the same. And once you pay it off, it’s gone — while the higher rate you refinanced to for your cash out is here to stay.
What’s more, because a home equity loan has your home’s equity as collateral, you’ll still often see a much lower rate with these than you would with unsecured debt – like that associated with a credit card. So, ultimately, it’s a great call for those one-time expenses – particularly consolidating and paying down debt.
Ultimately, the decision to refinance or choose a home equity loan depends on your needs and the state of the economy. While rates were low, if you had an excellent credit score, and you planned to stay in your home for at least a year, then a cash-out refinance could have been right for you. But those days have passed. However, as rates continue to increase, a home equity loan may be a better choice.
Interested in seeing what a home equity loan with First Northern might look like for you? Check out our Payment and Savings Estimators. BALANCE also has a wide range of resources to help you find what option is best for your budget and needs.
By Maria Carvell, Marketing Relations Supervisor