Mortgage Rates Dropped to 3.06% Last Week. Here’s How to Decide If a Cash-Out Refinance Makes Sense

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The average 30-year fixed mortgage rate dropped to 3.06% last week, down 0.05% from last week. Even though mortgage rates have not been below 3% since February, they are still considered historically low.

ABOUT THE LATEST MORTGAGE RATES

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.

Despite the low rates, homebuyers face unique challenges. Demand is up and inventory is low, which drives up home values. This increases the likelihood that the savings of a low mortgage rate might be negated by having to make higher offer prices to land a home. 

But existing homeowners have the opportunity to refinance their existing home loan into a new one with a better rate, and possibly lower their monthly payments. For some homeowners, a cash-out refinance in particular can be a good way to consolidate high-interest debt or pay for a big home improvement project. 

The Benefits of a Cash-Out Refinance 

A cash-out refinance replaces a current mortgage with a new mortgage for more than what is owed on the loan. At closing you’ll be paid out the difference between the two. Since mortgage interest rates are lower than rates on credit cards or personal loans, it’s an option worth considering. 

Cash-out refinances do come with pros and cons though:  

Pros

  • Access cash by tapping into home equity

  • Typically will have lower interest rates than a personal loan, credit card, or other unsecured financing methods

  • Mortgage interest payments may be tax deductible

Cons

  • Typically has stricter lending requirements than other types of mortgage refinancing

  • Typically has a higher interest rate than other types of mortgage refinancing

  • Closing costs can be 3%-6% of the loan’s value

  • If a cash-out refinance increases your loan-to-value ratio above 80%, the lender may require private mortgage insurance

  • Taking out a larger loan

When to Consider a Cash-Out Refinance

With favorable refinance rates right now, a lower interest rate could help lower your monthly payment and free up cash for things like home improvement projects or high-interest debt consolidation. 

Home Improvements

Home improvements can improve your home’s marketability and value, which can help if you’re thinking of selling in the future. A home that has been recently upgraded tends to make it more marketable, attract more buyers, and help the home sell more quickly with fewer hassles. Even if you change your mind and decide not to sell the home, the upgrades can improve your home’s value, making it easier to borrow more money against your home if needed. Keep in mind though that not all home upgrades provide the same return on investment. 

Consolidate High-Interest Debt

Refinance rates are likely lower than any credit card or personal loan rates right now. For people with high-interest debt across multiple accounts, consolidating payments into a new mortgage with a lower rate can help pay the debt down faster. A cash-out refinance can also lower your monthly payment, freeing up cash flow.   

Always Consider the Closing Costs

With any refinance move, it’s important to consider the closing costs. Depending on how much you save on your new rate and terms, the closing costs could outweigh the benefits. You also want to consider the break-even period, which is how long it will take you to recoup the cost of closing through the refinance savings. 

Here is an example of a cash-out refinance and how the closing costs could work out: 

  • Home value: $350,000
  • New 30-year cash-out refinance on a $200,000 loan balance
  • 4% closing costs

Taking out a new 30-year refinance loan with a loan balance of $200,000, and cashing-out on the total available equity of $80,000. The new loan total is $280,000. If closing costs were 4%, it will cost you $11,200. That is usually deducted from the cash-out total, so you’d walk away with $68,800 (not including incurred interest).  

Home ValueEquity LTV (80% of home value)Mortgage BalanceCash-Out MaximumNew Cash-Out Loan AmountClosing Costs (4% of total loan)Cash Paid at Closing(Minus closing costs)
$350,000$150,000$280,000$200,000$80,000$280,000$11,200$68,800

Keep in mind that a cash-out refinance, like the example above, will extend the mortgage payoff timeline, so make sure the near-term use of the cash-out is worth making payments for longer than you would have with the original loan.