As Refinance Rates Rise, Homeowners are More Motivated to Cash-Out

An article published by Investopedia on April 3, 2018 postulated that while rising mortgage rates were a deterrent for some homeowners looking to refinance, those seeking cash-out options may not feel the same trepidation. We’ve been talking about cash-out refinancing for a few weeks now, so this seemed like a great time to break down this trend and help our readers understand why cash-out can be a viable option in a fluctuating market. This week, we’re looking into the reasons homeowners tend to use cash-out refinancing when rates start to climb and what that trend could mean for homeowners looking to refinance in 2018.

Why Use Cash-Out instead of Traditional Refinancing?

When rates are high, it only makes sense that homeowners feel more trepidation about their refinancing options. Truly, what is the point of refinancing if it won’t save you money? Urban Institute, a non-profit organization focused on social and economic policy research, published their monthly report Housing Finance at a Glance for the month of March and stated something interesting. They proposed that the motivations of homeowners who refinance change when rates do. When refinance rates are low, for example, the motivation to refinance is in lowering their monthly payment. The report goes on to say, “when rates are high, borrowers have no incentive to refinance for rate reasons.” The reason cash-out rates tend to rise during these times, then, is because homeowners desire to cash-out more than they desire to lower their payments. This could due to any number of reasons, from consolidating debt to making home improvements. Regardless of the reasons behind the individual, the trend remains. The Urban Institute also found that cash-out refinances made up 63 percent of the refinance market in Q4 of 2017 due to rising rates; it is the highest percentage of cash-outs in the market since 2008.

What This Trend Means for Your Refinance Options

Cash-out is probably one of the best options if you’re looking to refinance at this point in the 2018. The Mortgage Monitor Report from Black Knight, Inc., a corporation which provides data and technology services to the real estate and mortgage industries, confirmed this. It states, rather bluntly, “cash-outs will likely continue to dominate the shrinking refinance market.” Published March 5, 2018, the report makes these claims using data the company collected throughout January of this year according to a press release on their website.

Obviously traditional refinances are still both possible and available, but this same report states, “the recent spike in interest rates cut the population of borrowers with an interest rate incentive to refinance by nearly 40 percent in 40 days.” So, if you were planning to refinance, make sure to talk with a trusted lender who can explain to you whether or not you are a part of that 40 percent of borrowers who would actually receive a higher interest rate should you chose to move forward with a traditional refinance option.

How to Use Cash-Out Refinancing to Your Advantage

If you are someone who was initially planning to refinance, but who unfortunately fell into that 40 percent of homeowners who were disincentivized by rising rates, a cash-out refinance may still be a viable option. It all truly depends on the motivation for your refinance. If you were looking to lower overall monthly payments, take a look at any other debt you’ve incurred over the years. A cash-out refinance can, for example, give you the funds to pay off a car payment, student loan, or outstanding credit card debt. Take a look at this example from The Mortgage Reports which illustrates how juggling multiple payments with varying interest rates tends to be more expensive on a monthly basis than consolidating them under a new mortgage payment, even if it is slightly higher than what you’re paying now. Not to mention, making one payment per month is much easier than using multiple websites, passwords, checks, stamps, and envelopes on different days to ensure every bill is paid on time. Any leftover funds after paying off debt can be used for home updates or put straight back into your monthly mortgage payment!

Ready to talk about your options? Wondering if a cash-out refinance is a good choice for you? Call Oceanside Mortgage today to talk with a trusted lender about your mortgage refinance options.