Mortgage Rates Are Up. Could a Cash-Out Refinance Still Make Sense?

Mortgage rates have actually fallen in recent weeks compared to where they sat earlier on in the fall. In fact, as of this writing, the average rate on a 30-year mortgage is 6.95%, per Freddie Mac.

But while mortgage lenders have lowered their rates more recently, borrowing is still pretty expensive for home buyers. It's also an expensive time to refinance a mortgage.

But there's a special type of refinance called a cash-out refinance that could still make sense today, despite higher borrowing costs. And if certain circumstances apply to you, you may want to refinance your mortgage after all.

There needs to be a good reason

A cash-out refinance allows you to borrow more than your remaining mortgage balance in the course of swapping an old home loan for a new one. Let's say you owe $150,000 on your mortgage, but have a home worth $300,000. If you need to borrow $50,000, you could do a $200,000 cash-out refinance where the first $150,000 pays off your original mortgage and the remaining $50,000 goes to you to use as you please.

It's generally best to do a cash-out refinance at a time when mortgage rates are low. Today, that's not the case. But it could still pay for you to take cash out of your home under the right circumstances.

Let's say you've expanded your family since buying your home and are desperate for added living space. If you have a basement waiting to be finished and you need money to pull that off, that would be a good reason to do a cash-out refinance even if you're not getting the best borrowing rate out of the deal. An upgrade like that could seriously improve your day-to-day quality of life.

You might also want to consider a cash-out refinance today if you have a lot of high-interest debt to pay off. Going back to our example, let's say you owe $50,000 on your credit cards and are paying 20% interest on that debt. If you're able to do a cash-out refinance at 7%, you'll lower the interest rate on that debt tremendously.

Of course, you'll need to consider the fact that you might be raising the interest rate on your remaining mortgage balance. But let's say you're paying 5% on your mortgage now. Raising your interest rate to 7% could make financial sense if it helps you consolidate your credit card debt.

And remember, you can always refinance a refinance. So if you do a cash-out refinance today and rates fall three years from now, you can potentially get back to your 5% rate. Only then, you'll have spared yourself from accruing 20% interest on a really large credit card balance.

Make sure your credit score is in good shape

For many homeowners, a cash-out refinance won't make sense today based on where rates stand. But if any of the above scenarios apply to you, then it could pay to take cash out of your home.

That said, to snag the best rate possible on a cash-out refinance, make sure you're coming in with strong credit. And if your credit score could use some work, try your best to raise it before applying for a new mortgage. You can boost your credit score by paying all bills on time and correcting errors on your credit report.

Paying down credit card debt can also result in a credit score bump. But if you're looking into a cash-out refinance for the express purpose of dealing with credit card debt, then that may not be much of an option.