Will a Cash-Out Refinance Make Sense for You in 2023?

It could, but there's probably a better way to get access to money.

Back in mid-2020, when mortgage rates started plummeting to record lows, many homeowners rushed to refinance so they could lower their housing payments. But mortgage refinancing activity has slowed down a lot in 2022, and for good reason.

Since the start of the year, mortgage rates have risen sharply. And at this point, many homeowners are looking at higher rates by refinancing than what they're paying on their mortgages now.

As such, it's fair to assume that refinancing won't make sense for a lot of homeowners in 2023 -- at least during the early part of the year. But is a cash-out refinance a different story?

Should you plan on a cash-out refinance?

With a regular refinance, you swap your existing mortgage for a new one with the same balance. With a cash-out refinance, you borrow more than your existing home loan balance so you get access to a sum of cash you can spend as you please. So if, for example, you owe $200,000 on a mortgage, you might do a $250,000 cash-out refinance.

Now it's pretty much never a good idea to do a cash-out refinance so you can plan a vacation or spend money on things that only give you temporary enjoyment. But it's a much more reasonable thing to do a cash-out refinance so you can renovate your home or address key repairs.

To be clear, you can use proceeds from a cash-out refinance for any purpose. It doesn't have to be home-related. And as long as you're borrowing for the right reasons, a cash-out refinance could make sense simply because it may be among the more cost-effective options you'll come across.

Right now, it's not just mortgage rates that are higher than they've been in a long time. Rather, pretty much all consumer borrowing rates are up. So whether you take out an auto loan, a personal loan, or a home equity loan, you're probably looking at spending more. The benefit of a cash-out refinance is that you may have more flexibility due to this being a secured loan -- it's backed by the clear equity you have in your home.

Another option to look at

One major downside of doing a cash-out refinance is that you may only need access to a smaller amount of cash, yet you're forced to refinance your entire mortgage. So before you go that route, you may want to consider a home equity loan instead.

Say you need to borrow $50,000 for a home renovation project, and you owe $200,000 on your mortgage. Instead of potentially subjecting yourself to a higher-than-average interest rate on a $250,000 sum by doing a cash-out refinance, you could instead get a home equity loan for $50,000.

In fact, a cash-out refinance really only makes more sense than a home equity loan in early 2023 if you happen to have a high interest rate on your mortgage already. If not, then a home equity loan is probably your better choice by virtue of being less expensive overall.