Cash-Out Refinance In A Bear Market: Why a Cash-Out Refi Might Still Make Sense For You
January 18, 2023 • 4 min read
When the economy is facing uncertainty, it’s important to make sure you are financially secure. Whether it’s for paying off high-interest debt, providing a safety net while looking for a new job, or for covering one-time emergency expenses, having extra cash can go a long way.
So where should you turn to when looking for extra cash? Surprisingly, your house might be your best, or even your only, option when it comes to securing extra funds at a reasonable interest rate. Using a cash-out refinance, borrowers can utilize their primary residence, or even an investment property, to unlock extra cash that might be sitting dormant in the form of unused property equity.
Though cash-out refinances are often used by investors who are looking to purchase an additional property or make home improvements — use-cases that are still applicable during down markets —there are also several other scenarios in which a cash-out refi can be a helpful way to access cash with reasonable terms and rates when money is tight.
Paying Off High-Interest Debt
A cash-out refinance can often be a great way to pay off existing high-interest debt such as credit card debt or personal loans.
If you have extensive credit card debt, which can be considered a high-interest loan, a cash-out refinance might be a great option for you as it can give you the ability to pay off that existing debt while taking out a new loan at a much lower interest rate. Credit cards can accumulate interest rates as high as 25% while mortgage rates, even with the recent increase in interest rates, still offer interest rates less than half of that. By refinancing to consolidate high-interest debt, , you can use the money you were using to pay off your credit card debt to pay down the mortgage loan’s principal balance, in addition to making the regular mortgage payment.
Additionally, if you are paying off multiple loans at the same time, you can utilize a cash-out refi to consolidate all your debt into one place. You might have a car loan, a student loan, credit card debt, or other type of loans and it’s easy to feel like you’re treading water with multiple high-interest payments going to various lenders each month. Consolidating all your loans into one, lower-interest mortgage might be able to save you a lot of time and money.
If you need money for your business — whether it’s a new business you’re starting that needs to cover its startup costs or an existing business that needs money to stay afloat — your property might be the best option for you to turn to get an injection of cash.
As a startup business owner, it might be difficult to get a traditional small business loan as you’ll most likely have to show cash flow and balance sheets, documentation that you might not have available yet.
As an existing business owner, not only can a cash-out refinance provide you with a loan for an emergency cash-injection that you might not be approved for, but it can also be used to provide your business with financial reserves as a preventative measure. And as mentioned, there’s a good chance that a cash-out refinance might be able to provide you with a better interest rate than a small business or personal loan. And unlike credit card debt, a cash-out refinance allows you to write off tax deductions.
Similar to any cash-flow emergencies one might experience as a business owner, one can also use a cash-out refinance to provide an injection of cash for any of their personal needs. In case there are any emergency medical bills that need to be covered, utilizing equity in your home can be a good option to secure the funds necessary to pay these expenses.
Additionally — especially in a struggling economy — a cash-out refinance can be used to secure financial reserves in case of any unplanned unemployment scenarios. A little extra cash in your pocket can go a long way towards providing you and your family the stability and security that is necessary in case you find yourself looking for new employment opportunities.
Additional Investments and Home Improvements
For some people, a struggling economy isn’t the right time to be thinking about buying a second residence or an investment property. However, for those people who have financially prepared themselves to take advantage of a lull in the market and lowering housing prices, it can be a great time to consider a cash-out refinance to purchase that next property.
Though housing prices have dipped nationally over the last few months, most houses still have a significantly higher valuation than they did from just a few years ago — providing homeowners with more equity in their property than they might’ve had when they originally acquired the place. Using this extra equity that has accrued in the property over the last few years, homeowners can take advantage of a dip in home prices to purchase a new property at a discount before prices reverse course.
This extra cash can either help you pay for a new property in all cash or provide you with the means to lay out a down payment. And even with increasing interest rates, it shouldn’t be a deterrent to purchase that new property — you can always refinance your mortgage when interest rates eventually retreat back to normal levels.
Additionally, for those that are considering selling a property but want to wait until the housing market recovers, now might be the perfect time to do renovations on that property to increase its value. A cash-out refinance is a great way to invest in your current property.
For those that are considering paying off high-interest debt, helping their business, or funding emergency expenses, a cash-out refinance might make sense. However, there many aspects to keep in mind when examining if a cash-out refi is the right financial solution, and a lot of these are situationally dependent. We advise you to speak with your financial consultants to see if a cash-out refi might be the right move for you.
To learn more, speak with our loan consultants today.
The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.
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