Refinances Move Sharply Higher?

Market Insights from D.C. Aiken

Refinances moved exceptionally higher this week as more and more folks are looking to giving up their below 4% mortgage rates in exchange for high 6% mortgage rates to pay off their accumulated debt. On the surface, this sounds crazy, but is it?  According to Black Knight, the average home in the US has over $300K in untapped equity, and the average home has a loan-to-value of less than 46%. While credit card and unsecured consumer debt levels have risen to all-time highs, the average credit score in the US is a surprising 715, which is truly fascinating. It seems like our average citizen is “partying like it is 1999” and has run their credit to their limit or to a point where they will never pay it off. “I have room on my credit card; I need that new table.” Probably not a good idea, but it happens every day, and the next thing you know, you now have a $20K balance and are maxed out on your credit card. Just like many parties, the hangover the day after is painful, and this “hangover” in the long term could be very painful for the average homeowner if this economy begins tightening up soon.

Let’s assume you have a mortgage in the $400K range and are paying at 4% on a 30-year fixed-rate mortgage. This would yield a principal and interest payment of roughly $1900 per month. But you also have $40,000 in credit card debt, a student loan debt of $75,000, and a car loan of another $35,000 for a total of $150,000. Let’s assume the payment on this $150,000 debt is around $2500 per month. So, between your house payment (without taxes and insurance) of $1900 per month plus the consumer debt minimum payment of close to $2500 per month, you are now paying $4400 per month, and that is simply the minimal payment.

A Sample Scenario

Let’s assume you decide to do a cash-out refinance for a total of $550,000 at an estimated rate of 6.75% on a 30-year fixed rate, which would pay off, prior to paying any closing cost or escrows, the three debts mentioned above, as well as your current 4% mortgage. The result of this new mortgage payment would be roughly $3550 per month. In this example scenario, you would save over $800 per month on these four debts, which is a nice chunk of change.

However, if you go back out and run up your non-mortgage-related debt again or go out and buy a new car or boat, all you have done is raise your mortgage payment while getting back into the same situation you were in before. If you are disciplined, this is not a bad idea in the long run.  However, you must be disciplined.

Check with your mortgage professional to run different scenarios for you and see if doing a cash-out refinance makes since for you.

Remember… The BEST RATE… IS A LOCKED RATE… with a float down… ask me about our program that allows you to lock your rate and then float down if rates move lower.

Make sure you (or your buyer) get pre-approved before looking at homes so we can determine if you are looking in the correct price range and have you armed to submit an offer with a pre-approval letter!

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Blog post date: Thursday, February 8, 2024

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The opinions expressed within this article are the author’s and do not necessarily reflect the opinions or views of BankSouth Mortgage or its affiliates.