- A redemption refinement allows you to borrow against your own home equity and put the cash into other financial goals.
- The median home price rose from $ 329,000 to $ 408,100 during the pandemic, giving homeowners plenty of equity to leverage.
- Now could be a good time for cash refinancing, as house prices are rising while mortgage rates are still relatively low.
- Read more from Personal Finance Insider.
Mortgage rates are rising and, as a result, fewer Americans are interested in refinancing.
However, homeowners also have a lot of equity right now, thanks to the dizzying rise in house prices that has defined the pandemic housing market.
In the first quarter of 2020, the average U.S. housing price was $ 329,000. As of the first quarter of 2022, that number has jumped to $ 408,100, according to data from the Census Bureau and the Department of Housing and Urban Development.
Because homeowners have gained so much value in the last two years, many are in a good position to take advantage of their own funds with cash refinancing – even as interest rates continue to rise.
How does a redemption refinance work?
Like interest rate and duration refinancing, a cash refinance replaces your current mortgage with a new one. However, with cash refinancing, you will borrow more than you currently owe on your mortgage and pocket the difference. In most cases, you can borrow up to 80% of the value of your home. Here is an example of how it might work:
Your home is worth $ 300,000 and you still owe $ 150,000 on your mortgage. You decide to get redemption with redemption for the full amount you can borrow, which is $ 240,000 (or 80% of $ 300,000). Once you repay your current mortgage, you will have $ 90,000 left (240,000 – 150,000 = 90,000), minus the closing costs. These remaining funds are yours to use as you wish.
Mortgage rates are rising, but they are still relatively low
It usually makes sense to refinance your mortgage only if you can get a lower interest rate than what you are currently paying. Rates are higher now than the historical lows of the last two years. But they are still below the 2018 ceiling, when they almost exceeded 5%. according to Freddie Mac.
In addition, even when interest rates rise, redemption refinancing is often cheaper than other options, says Melissa Cohn, regional vice president Mortgage William Raveis.
“Mortgage rates are significantly lower than credit card debt or other types of loans,” says Cohn.
For example, while national mortgage rates are still below 5%, many people pay much more than 10% interest on their credit card debt. And the lower your credit score, the higher the interest rate on your credit card.
Homeowners earned a lot of equity during the pandemic
One big reason why cash refinancing can still be beneficial for homeowners is that, after two years of rapidly increasing home value, this group has a lot of equity at their disposal.
Because market conditions have given homeowners something that is essentially free money, it may make sense to use some of this wealth and use it to improve your financial situation, either by reinvesting it in your home or by consolidating high debt interest rate.
Sonu Mittal, head of mortgage lending at Citizens Bank, says he often sees people using cash refinancing for things like housing improvements, debt consolidation or to cover big markets.
“People can use cash for any of their financial needs,” says Mittal. There are no rules on how you can spend your money.
Although you usually renovate a house they do not pay completely for themselvesthe right ones can help enhance the value of your home to some extent and increase your own enjoyment of your home.
Redemption refinancing can be cheaper than other options
Redemption refinancing allows you to borrow money at a relatively low interest rate and repay it over a long period of time.
Cash refinancing alternatives include equity loans or home equity credit limits, personal loans or credit cards. The best option for your situation depends on how much you need to borrow, how quickly you think you will be able to repay the funds and how much you will pay in interest and commissions.
“If you want to use redemption refinancing revenue in the near future for a home renovation, debt consolidation or other life-changing event and do not expect to repay it or pay it off in two to three years, mortgages “Fixed-rate loans give you peace of mind and reduce the impact on your monthly cash flow, as you can pay them off in 30 years,” says Mittal.
The bottom line: If you can get a lower rate refinancing rate than with your other loan options and have enough equity in your home, it could be a smart move.