The Hidden Value of Cash Out Refinances

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By Jim Cook - Mortgage Loan Officer, Plymouth

After a period of unprecedented low mortgage rates, many homeowners currently have mortgages with fixed low rates we may not see again for decades - if ever. It would be easy to assume there would be no reason to ever consider refinancing one of these loans, and in many cases, that's probably true. However, in some cases refinancing to a higher rate may be a smart option. 

Since the time rates hit historic lows, the values of residential homes have continued to respond to high demand coupled with limited supply of homes available for purchase. This means homeowners may be sitting on significant equity built by market value increases as well as principal loan balance pay down. So, this is all great and I should continue to ride these graph lines, right? If you have no other debt and have no need for additional borrowing, the answer is yes, of course.

Here is where we talk about life happening. During that time that has passed since many of us financed the purchase of our homes or refinanced to a lower rate, what else has taken place? Well, life. If you have financed expenses on credit card accounts, completed home repairs or improvements using a home equity line of credit, or if you anticipate the need to borrow for renovations, a wedding, travel, a vacation home, creating or expanding a business, or anything else, it is time to look at the "blended rate," or the combined rate of all of the debt you will carry.

How do I compare the cost of refinancing my debt into a mortgage loan to the current or anticipated costs using revolving credit? Blended rate calculators are available on some financial websites and in personal accounting software. The simple example below helps to demonstrate a blended rate calculation based on the following example accounts: 

  • Mortgage: $200,000 at 4.0%
  • Home Equity Loan: $75,000 at 12.0%
  • Unsecured/Revolving: $15,000 at 17.0%
The effective blended rate for these accounts is 6.649%. As mortgage rates continue to move below that rate, it may be advantageous to refinance this mortgage paying off all three accounts.

Ultimately what is most important is that you, the homeowner, avoid ruling out a refinance solely on the grounds that your current rate is lower than available rates. Review the whole picture and consider your financial goals before making a decision. And don't try to do it alone - engage qualified professionals to help you make the best choice for your specific goals and finance needs.

You may also like:

When to Consider Refinancing
Ways to Pay Off Your Mortgage Early
How Does Mortgage Refinancing Work?