In economic uncertainty, many homeowners may struggle to make ends meet or pay off high-interest debts. As a country, we are facing $1 Trillion in debt. 

New PCE readings indicate lower spending, but we still see rising debt and low savings. With the Fed looking to potentially hike interest rates again and pressure payrolls, we may be in for a recession (if not already in one). 

So what can we do to weatherproof our finances for this storm? One option to consider is cash-out refinancing, a type of mortgage refinancing that allows homeowners to borrow against their home equity and receive cash in exchange for their equity.

Let’s explore the ins and outs of cash-out refinancing, its benefits during a possible recession, and what homeowners should consider before pursuing this option.

What is Cash-Out Refinancing?

Cash-out refinancing is a type of mortgage refinancing that allows homeowners to take out a new mortgage with a higher principal balance than their existing one. The difference between the two mortgages is then given to the homeowner as a lump sum of cash, which they can use for any purpose.

For example, let's say a homeowner has a mortgage with a principal balance of $200,000, and their home is now worth $300,000. If they decide to pursue cash-out refinancing, they can take out a new mortgage with a principal balance of $250,000, giving them $50,000 in cash for home improvements, debt consolidation, or any other purpose.

Benefits of Cash-Out Refinancing during a Possible Recession

Lower Interest Rates

1. The Federal Reserve typically lowers interest rates during a recession to stimulate the economy. If you have an existing mortgage with a high interest rate, you can take advantage of lower interest rates by refinancing your mortgage. This can result in a lower monthly payment, allowing you to free up cash for other expenses.

Debt Consolidation

1. One of the most common uses of cash-out refinancing is debt consolidation. If you have high-interest credit card debt or other unsecured loans, you can use the cash from your refinanced mortgage to pay off those debts. This can reduce your monthly payments and help you save on interest charges over time.

Home Improvements

1. Another widespread use of cash-out refinancing is home improvements. If you have been putting off renovations or repairs due to a lack of funds, cash-out refinancing can provide you with the cash you need to make those upgrades. This can increase the value of your home, making it a more attractive investment in the long run.

Emergency Funds

1. Many people may face unexpected expenses during a recession, such as medical bills or job loss. Cash-out refinancing can provide you with a lump sum of cash that you can use to build an emergency fund, giving you greater financial security during uncertain times.

Considerations Before Pulling the Trigger on a Cash-Out Refinancing

While cash-out refinancing can provide many benefits, it’s essential to consider the following factors before deciding to pursue this option:

Closing Costs and Fees

1. Cash-out refinancing typically comes with closing costs and fees, which can add up to thousands of dollars. Make sure you factor these costs into your decision and ensure that the benefits of refinancing outweigh the costs.

Increased Debt

1. Cash-out refinancing increases your mortgage debt. This means that you will be paying more interest over the life of the loan, which can outweigh the benefits of the cash you receive. 

Home Equity Reduction

1. By taking out a larger mortgage, you are reducing the equity you have in your home. This can make it harder to sell your home in the future or to refinance your mortgage again.

Qualifying Requirements

1. Cash-out refinancing typically requires you to meet specific qualifying requirements, such as a credit score or a specific debt-to-income ratio. Make sure you meet these requirements before pursuing this option.

Bottom Line

Cash-out refinancing can be valuable for homeowners facing financial difficulties during a recession. It can provide much-needed funds for debt consolidation, home improvements, emergency funds, and more. 

However, before pursuing this option, you must carefully consider the potential costs and risks. By doing so, homeowners can make an informed decision that will benefit them in the long run and help them weather any financial storms that come their way.

Want more information on the current state of the economy and opportunities to bolster your finances? Check out the latest episode as we dive deeper into the recent PCE.