It’s no secret that mortgage rates are no longer cheap.
In the first quarter of 2022, you can still get a fixed 30 year in the 3% range.
Within a year, rates had risen by 8%, before falling in 2024 to around 6% and rising again to 7% before the election. It’s been a ride.
Today, 30 years stands at around 7% in your typical mortgage situation, but it can be even higher for other things like refinancing.
To make matters worse, the average homeowner already has a low rating, so losing it could be a huge mistake.
A Cash-Out Refinance Pays Off Your Existing Mortgage
Lately, I have been hearing firsthand many stories of people struggling financially. The easy money days of the pandemic are in the rearview mirror.
There is no renewal and the prices for almost everything are much higher than they were a few years ago.
Whether it’s a homeowners insurance policy or a trip to your favorite fast food restaurant, prices are not your friend right now.
This may force you to start relying on credit cards more recently, racking up debt as you go.
And maybe now you are looking for a way to reduce the burden and reduce the interest costs.
After all, credit card APRs are also on the rise, with average interest rates exceeding 23% of those actually assessed interest, according to the Federal Reserve.
Obviously that’s wrong. No one should be paying such high prices. That makes no sense.
So it would be wise to eliminate the debt somehow or reduce the interest. The question is which strategy is best?
However, some loan officers and mortgage brokers offer refinances to homeowners with high unsecured loans.
But there are two big problems with that.
You Will Lose Your Low Mortgage Rate In The Process
When you apply for financing, whether it’s a rate and term refinance or a cash-out refi, you lose your old rate.
Simply put, a refinance results in the old loan being paid off. So if you currently have a loan with a 3% loan-to-value ratio (or maybe 2%), you can get a good kiss from the process.
Obviously this is not a good solution, even if it means paying off all your other expensive debts.
Why? Because your mortgage rate may be very high, maybe in the 6% or 7% range.
Sure, that’s less than the 23% credit card rate, but it will apply to your ENTIRE loan balance, including the mortgage!
For example, let’s say you qualify for a 6.75% interest rate on refinancing. It doesn’t just apply to the money you take out to pay off those other debts. It also applies to your home loan balance.
Now you have an even bigger mortgage balance with a much higher loan amount.
Let’s pretend you took out a $400,000 loan at 3.25%. Your monthly payment would be $1,741.
After three years, the outstanding loan balance will drop to about $375,000. Okay, you’ve made some progress.
If you re-deposit and withdraw say $50,000, your new balance would be $425,000 and the new 6.75% fee would be $2,757!
So now you’re paying another $1,000 a month on your mortgage.
But wait, it gets worse.
Want To Pay Off That Other Debt For The Next 30 Years?
Not only did your monthly payment exceed $1,000, but you also combined your mortgage and non-mortgage debt.
And depending on your new loan quarter, you could be paying it off for the next three decades. That is absolutely wrong.
Some lenders will allow you to keep your existing loan term, so 27 years in our example. Some may only offer a new term of 30 years.
Either way, you’ll be paying those other bills much less. If you just try to deal with them separately, you will probably be able to fix it much faster.
And remember, your mortgage payment is over $1,000 a month. That money could go towards other debts.
Even if the new mortgage payment is lower than the combined monthly payments of the refinance, it may not be good.
A better option would be to take out a second mortgage, such as a home equity line of credit (HELOC) or a home equity loan.
Both of these options allow you to keep your original low mortgage rate while tapping your equity to pay off other debts.
And the interest rates should be within the cash out refi rate. Maybe higher, but you say something like 8% or 9%, instead of 6.75%.
Importantly, this maximum rate will only apply to the withdrawal portionnot the entire loan balance as would be the case with a cash-out refinance.
So yes, the maximum balance is $50,000, but still 3.25% (using our previous example) on the largest balance, which should result in a much better compound interest rate.
And it doesn’t reset the clock on your existing mortgage, allowing you to stay on track with your payment goals.
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