As real estate in Chicago and across the country continues to be in a good place, many homeowners are taking advantage of the market’s health by refinancing—specifically, using refinancing to cash in on some of the equity of their home.
A cash-out refinance allows a homeowner to withdraw cash form the equity of their home when changing the interest rate on their mortgage. The cash might be used for home repairs or upgrades, to reduce debt or pay for other large expenses.
Those refinancing their mortgages are on the rise, according to a recent article in the Wall St. Journal. More so, those taking out cash with their refinance is at the highest its been since 2008. Both are indications of rising home values and the confidence of borrowers to capitalize on it.
But while there’s the allure of cash that is seemingly just “sitting there,” it’s especially important for borrowers to know exactly what they’re getting into before doing a cash-out refinance. There’s the potential risk of getting into too much debt should home prices fall, and there could also be alternative options for getting cash that would bring less risk and cost for the homeowner.
Here are a few considerations to make if you’re looking into a cash-out refinance on your Chicago home:
What’s the money for? Using the cash for upgrading or improving your home could bring the long-term benefit of increasing its resale value. Using it to pay off credit card debt could also be beneficial since the interest rate is likely significantly lower. Buying a big-ticket item or paying for a vacation with the money is a riskier option, especially because you are putting your home on the line if any payments are missed.
Is there a lower interest rate? If your move is motivated by just the cash, make sure you would actually be refinancing into a lower interest rate. If you locked in your loan in the last few years, chances are interest rates were under 4% and you won’t likely get a fixed rate lower than that now. An adjustable-rate loan with a lower rate upfront could still end up costing you more in the long run.
Don’t forget closing costs. If you’re looking to save money, don’t lose sight of the fact that refinancing in not free. Closing costs are about 2% of the loan amount, and refinancing means starting over with a loan’s “early payments” of mostly interest charges. The latter can be helped by opting for a shorter loan.
Consider a HELOC. A home equity line of credit could be the better option, depending on your situation. The interest rate will likely be a bit higher, but the amount borrowed is probably smaller and borrowers pay less in interest charges on a HELOC than on a mortgage. There are also far lower closing costs.
There are a number of different approaches to refinancing and it’s crucial that you work with a mortgage professional who has your interest in mind. You want to work with someone who can explain all of the different types of nuances that come with each type of loan and the refinancing process to ensure it’s in line with what you’re looking to accomplish.