Why Now Might Not Be the Right Time for a Cash-Out Refinance

If you’re planning to buy a home in St. Louis or exploring your mortgage options, understanding the financial landscape is crucial. As the owner of Carlson Mortgage, I aim to provide insights to help you make informed decisions. One popular but potentially risky option is a cash-out refinance—and here’s why you might want to think twice about it right now.

Mortgage Rates Are Higher Than Ever

Gone are the days of ultra-low mortgage rates. Back in early 2022, 30-year fixed rates were still hovering around 3%. Fast forward a year, and rates surged past 8% before settling near 6% in 2024. However, as we approach 2025, rates have risen again to about 7% for standard loan scenarios. For cash-out refinances, rates can be even higher, making this option less appealing for many homeowners.

What Is a Cash-Out Refinance?

A cash-out refinance replaces your existing mortgage with a new, larger loan. The difference between your new loan amount and your current balance is given to you as cash. While this might sound appealing if you’re facing high-interest debts, there are significant downsides to consider.

The Downside of Losing Your Low Mortgage Rate

Many homeowners locked in rock-bottom rates during the past decade. If you’re sitting on a mortgage with a 3% or even 2% interest rate, replacing it with a loan at 7% or higher could be a costly mistake.

Let’s break it down: Imagine you originally borrowed $400,000 at a 3.25% rate, resulting in a monthly payment of $1,741. After three years, your loan balance might be around $375,000. If you then opt for a cash-out refinance, pulling out $50,000, your new balance becomes $425,000 at a 6.75% interest rate. Your monthly payment jumps to $2,757—that’s over $1,000 more each month!

Extending Debt for Decades

Another issue with cash-out refinances is the potential to stretch non-mortgage debt over a 30-year term. Even if your monthly payment is lower than the combined payments of your existing mortgage and other debts, you’re now repaying everything—including credit card balances—over decades. This extended timeline often means paying much more in interest over the life of the loan.

Better Alternatives to a Cash-Out Refinance

If you’re considering leveraging your home’s equity to manage debt, there are smarter ways to go about it:

• Home Equity Line of Credit (HELOC): A HELOC allows you to access your home’s equity without refinancing your existing mortgage. While the rate may be slightly higher (e.g., 8-9%), it only applies to the amount you borrow, not your entire mortgage balance.
• Home Equity Loan: Similar to a HELOC but with a fixed rate, this option also lets you keep your current mortgage terms intact.

These alternatives can help you tackle high-interest debt while preserving your low mortgage rate and staying on track with your financial goals.

Final Thoughts

While a cash-out refinance might seem like an easy way to reduce debt or free up cash, the higher rates and long-term implications often outweigh the benefits. Before making any decisions, consult with a trusted mortgage broker who understands your unique financial situation.

At Carlson Mortgage, we’re here to guide St. Louis homebuyers and homeowners through the complexities of the mortgage process. Let’s explore options that align with your goals without jeopardizing your financial future.

Ready to Secure Your Dream Home in St. Louis?

At Carlson Mortgage, we’re dedicated to helping St. Louis residents navigate the mortgage process and find the perfect loan for their needs. Our experienced mortgage brokers can help you find the perfect loan to fit your needs and budget and will help you make informed decisions about buying a home. Call or text us at (314) 329-7314 or fill out our loan application at www.carlsonstl.com/apply.ved for a purchase or a refinance mortgage, or if you have any general mortgage lending questions.