Mortgage rates drop to 3.06% last week – does Refi’s withdrawal make sense?
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The 30-year average fixed mortgage rate fell to 3.06% last week, down 0.05% from last week. Even though mortgage rates have not been below 3% since February, they are still considered historically low.
ABOUT LATEST MORTGAGE RATES
Last week’s average mortgage rate is based on mortgage rate information provided by national lenders to Bankrate.com, which, like NextAdvisor, is owned by Red Ventures.
Despite the low rates, home buyers face unique challenges. Demand is up and inventories are low, pushing up home values. This increases the likelihood that the savings from a low mortgage rate will be outweighed by having to bid higher for a home.
But existing homeowners have the option of refinancing their existing home loan to a new one at a better rate, and possibly lowering their monthly payments. For some homeowners, a cash refinance in particular can be a good way to consolidate high interest debt or pay for a large home improvement project.
The advantages of refinancing with withdrawal
A cash refinance replaces a current mortgage with a new mortgage for more than what is owed on the loan. At closing, you will be paid the difference between the two. Since mortgage interest rates are lower than credit card or personal loan rates, this is an option to consider.
However, refinancing with withdrawal has advantages and disadvantages:
Access cash by tapping into the equity in your home
Usually will have lower interest rates than a personal loan, credit card, or other unsecured financing method
Mortgage interest payments may be tax deductible
Usually has more stringent loan requirements than other types of mortgage refinancing
Usually has a higher interest rate than other types of mortgage refinancing
Closing costs can be 3-6% of the loan value
If a cash-in refinancing increases your loan-to-value ratio above 80%, the lender may require private mortgage insurance.
Take out a larger loan
When to consider refinancing with withdrawal
With favorable refinance rates right now, a lower interest rate could help lower your monthly payment and free up money for things like home improvement projects or high interest debt consolidation.
Home improvements can improve the market value and the value of your home, which can be useful if you plan to sell in the future. A home that has been recently renovated tends to make it more marketable, attract more buyers, and help the home sell faster with less hassle. Even if you change your mind and decide not to sell the home, improvements can improve the value of your home, allowing you to borrow more money against your home if needed. Keep in mind, however, that not all home upgrades offer the same return on investment.
Consolidate high interest debt
Refinance rates are probably lower than credit cards or personal loans right now. For people with high interest debt on multiple accounts, consolidating payments into a new, lower rate mortgage can help pay off the debt faster. Refinancing with withdrawal can also reduce your monthly payment, freeing up cash.
Always consider closing costs
With any move to refinance, it is important to consider the closing costs. Depending on how much you save on your new rate and terms, the closing costs could outweigh the benefits. You should also consider the break-even period, which is how long it will take you to recoup the cost of the close through the refinancing savings.
Here is an example of withdrawal refinancing and how closing costs might work:
- Home value: $ 350,000
- New 30-year cash refinancing on a loan balance of $ 200,000
- 4% closing costs
Take out a new 30-year refinance loan with a loan balance of $ 200,000 and cash out total available equity of $ 80,000. The total new loan is $ 280,000. If the closing costs were 4%, it will cost you $ 11,200. This is usually deducted from the total withdrawal, so you’ll end up with $ 68,800 (not including interest incurred).
|Home value||Equity||LTV (80% of the value of the house)||Mortgage balance||Maximum cashout||Amount of the new withdrawal loan||Closing costs (4% of total loan)||Cash payment at closing (less closing costs)|
|$ 350,000||$ 150,000||$ 280,000||$ 200,000||$ 80,000||$ 280,000||$ 11,200||$ 68,800|
Keep in mind that a withdrawal refinance, like in the example above, will extend the mortgage repayment period, so make sure that the short-term use of the withdrawal is worth doing. payments longer than you would have with the original loan.