Thinking of Cashing Out? Here’s Why You Should Think Again!

Let’s face it: mortgage rates are no longer the bargain they used to be!

Back in early 2022, snagging a 30-year fixed mortgage at a cozy 3% was still on the table. Fast forward to today, and we’re grappling with rates that have soared close to 8%—and while they dipped to around 6% in 2024, they’re already creeping back up to 7% as we approach the election. What a rollercoaster!

Currently, if you’re looking for a 30-year mortgage, expect to see numbers hovering around 7%, and in some cases, especially with cash-out refinances, it might be even higher.

To top it off, many homeowners are sitting pretty with low mortgage rates that are hard to let go of. Losing that golden rate could be a costly mistake.

Cash-Out Refinancing: Is It Worth It?

These past few months, I’ve been hearing too many stories of people feeling the financial pinch. The carefree days of easy money during the pandemic are behind us, and there’s no more stimulus to soften the blow. Prices on everything from homeowner’s insurance to that quick bite at your favorite fast-food joint have skyrocketed. Right now, the cost of living is not on your side.

This squeeze might have you leaning more on your credit cards, piling up debt faster than you can say “interest rate.” And let’s not kid ourselves—credit card APRs are soaring, with average rates now exceeding 23%, according to the Federal Reserve.

That’s downright alarming. Nobody should be paying such shocking rates; it’s downright common sense.

So, what’s the solution? It’s time to think strategically about how to tackle that debt and lighten your financial load.

Many loan officers and mortgage brokers are hawking cash-out refinances as a magic fix for those high-interest debts. But let’s pump the brakes for a moment.

The Hidden Cost of Losing Your Low Mortgage Rate

Here’s the catch: whenever you go for a refinance—be it a rate-and-term refinance or a cash-out option—you’re waving goodbye to your current rate. That’s right! Refinancing means your old loan is paid off. So if you currently enjoy a mortgage rate of 3% or even 2%, you’ll be kissing it goodbye!

That’s not exactly a trade-off worth making, even if it helps you tackle other debts. Why? Because your new mortgage rate will likely be much higher—think 6% or 7%.

Sure, it’s a better deal than a 23% credit card rate, but remember, it applies to your ENTIRE loan balance, not just the cash you’re pulling to pay off those debts!

For instance, let’s say you qualify for a 6.75% rate on a cash-out refinance. Not only will it apply to the new cash you’re taking out, but it’ll also cover your remaining mortgage balance. Now you’re staring down an even larger mortgage at a significantly higher rate.

Imagine you took out a $400,000 loan at 3.25%. Your monthly payment would be roughly $1,741. After three years, your remaining balance drops to about $375,000, so far, so good.

Then you decide to refinance and pull out $50,000. Your new balance? $425,000. And your new payment at 6.75%? A staggering $2,757! That’s an additional $1,000 you’re shelling out every month for your mortgage.

But wait—there’s more.

Are You Ready to Shoulder That Debt for 30 Years?

Not only has your monthly payment shot up by $1,000, but you’ve also combined your mortgage with your non-mortgage debt. Depending on your new loan term, you could be stuck paying it off over three decades. Not exactly the financial freedom you were hoping for!

Some lenders might let you keep your existing loan term, but others will only offer a fresh 30-year deal. Either way, you’re going to be paying off those other debts much more slowly than you would if you tackled them separately.

And remember that extra $1,000 a month? That could have been directed towards knocking down your other debts much quicker.

Even if the total mortgage payment is a tad lower than your previous combined payments, it still might not be the best option.

Consider a more strategic approach: a second mortgage, such as a home equity line of credit (HELOC) or a home equity loan.

These options allow you to hold on to your low first mortgage rate while tapping into your home equity to pay off those pesky debts. Interest rates may be a touch higher, perhaps around 8% or 9%, but remember, this rate applies only to the cash-out portion—not your entire loan balance.

So yes, you may face a higher rate on that $50,000 portion, but you’ll still enjoy that fabulous 3.25% on the larger balance, leading to a much healthier blended interest rate overall. Plus, you won’t reset the clock on your existing mortgage, keeping your payoff goals in sight.