In 2021, mortgage rates plummeted to an all-time low, causing a surge in the number of buyers looking to purchase a home. Because of the already low housing inventory, market competition increased dramatically and home prices rose nearly 20%. As a result, many people have experienced an increase in the market value of their homes and now have more equity.
If this sounds like your situation, you may be wondering, is now the right time to do a cash-out refinance? A cash-out refinance allows a homeowner to take advantage of the equity they’ve built and obtain cash under new mortgage terms.
Below, we’ve discussed some of the pros and cons of obtaining a cash-out refinance in 2022.
How Does a Cash-Out Refinance Work?
It’s important to note that a cash-out refinance is different than a home equity loan. A home equity loan acts like a second mortgage. During a cash-out refinance, however, the borrower takes out a new loan that’s larger than their existing mortgage. This new loan is used to pay off and replace the previous mortgage. Then, the homeowner receives the difference in cash.
To obtain a cash-out refinance, you’ll need to meet certain requirements such as:
- Typically, at least 20% equity in your home. This means you’ll need to have paid off at least 20% of the current appraisal value of your home.
- Have owned your home for at least six to twelve months, depending on the type of loan you have
- Meet credit score and debt-to-income requirements
Pros and Cons of Cash-Out Refinance in 2022
Before taking out a cash-out refinance, it’s important to consider the potential risks and benefits. Here are some of the pros and cons that homeowners should consider in 2022:
- Con – Inflated home prices: Right now, the market is experiencing inflation in home prices due to high demand and low supply. If you take out a cash-out refinance and your home’s value suddenly plummets, you could end up owing more than your home is worth.
- Pro – Access to funds: In some cases, it makes financial sense for a homeowner to do a cash-out refinance because the homeowner could use the extra funds in a meaningful way. Examples include consolidating debt, paying off high-interest credit cards, or financing a home improvement project. It’s important to consider the whole picture.
- Con – Higher interest rate: If your existing mortgage rate is lower than it would be with a cash-out refinance, you could end up paying more in the long run.
- Pro – Lower interest rate: Conversely, if your existing mortgage rate is higher than it would be with a cash-out refinance, you could end up saving money.
- Con – Less equity in your home: Home equity is kind of like having a forced savings account. The less equity you have, the more risk you take on.
Speak to an Expert
Wondering if a cash-out refinance is right for you? Our home loan experts are here to help. Call our office today to get the professional advice and assistance you need.