Is It Worth Taking a Higher Rate on a Cash-Out Refinance?

In an ideal world, you could lower your interest rate while getting a cash-out refinance.

But in reality, most people who got their mortgage before mid-2022 will receive a higher rate if they refinance.

Is moving up in rate worth the cash? It could be in the following situations.

You Are Paying Off High-Interest Debt

U.S. credit card debt just eclipsed $1 trillion. Interest rates are somewhere between 25% and 30%.

Someone with $20,000 in credit card debt is paying over $5,000 per year in interest.

Homeowners should consider investing that $5,000 in closing costs on a cash-out refinance to avoid paying year after year.

Proof in Numbers:

You Need a Lot of Cash

The more cash you need, the more attractive a cash-out refinance gets.

This is for a couple reasons.

First, cash-out refinance closing costs can be $5,000 or more. Taking just a small amount of cash doesn’t make sense.

Second, other forms of borrowing come with higher interest rates. Credit cards, personal loans, and even home equity lines of credit (HELOCs) can be anywhere from 2% to 20% higher

Proof in Numbers:

*Rates shown are for example purposes only. **Cash-out payment based on new $350k loan. HELOC and home equity loan scenarios assume keeping the 1st mortgage.

While a cash-out loan doesn’t come with the lowest payment, some homeowners may choose this option to avoid the variable interest rate and interest-only feature of a HELOC.

You Have a Small Loan Balance

You don’t lose much by refinancing into a higher rate on a loan of around $100,000. The balance simply isn’t big enough to make a life-changing difference.

While interest rises from 3% to 6.5% on the primary mortgage portion, a cash-out refinance is still affordable than borrowing$100,000 with a home equity loan.

Proof in Numbers:

You Are Getting Divorced

Sometimes you need to get a cash-out refinance during the divorce for two big reasons:

1. Remove the ex-spouse from the loan

2. Buy out a spouse’s equity

Most likely, your rate and payment will rise with the refinance. But if you’re under court order to pay out the spouse’s equity, you don’t have much choice.

Luckily, Fannie Mae recently introduced the Equity Buyout Refinance. With it, the refinance is not considered a cash-out loan if it is used only to buy out a former owner’s equity. This reduces the rate on the new mortgage.

You Need to Improve Cash Flow

Sometimes it’s worth paying more interest in the long-run to shore up finances now.

For instance, you will soon start a business where you expect your income to drop for a time. Or, a spouse is laid off.

There are plenty of life circumstances where you should choose to lower your monthly expenditures even if it costs more long-term.

Proof in Numbers:

You Can Invest in a High-Return Opportunity

It’s not always smart to use home equity to invest, but in some cases, it can make sense.

For example, you happen upon an off-market property being sold for 75% of its value. Or, your business needs a cash infusion to gain a big client.

While there’s no sure-fire investment, some opportunities are sound enough to justify accepting a higher mortgage rate. The likely return is much more than you will pay in higher interest.

Plenty of Reasons to Refinance

It’s never fun to pay more interest for your mortgage. But it’s worth it in many circumstances.

Get a personalized review of your situation by a reputable lender.