Cash-Out Refinances Reached $1.2 Trillion in 2021. Here's Why Now's a Great Time to Sign Up for One

You may want to do a cash-out refinance before mortgage rates go higher.

Many people refinance their mortgages in an effort to slash their monthly payments. But in some cases, refinancing your mortgage could leave you with a comparable monthly mortgage payment, or even a higher one -- and that's not necessarily a bad thing.

If you do a cash-out refinance, you might land in this situation. That's because a cash-out refinance lets you borrow more than your remaining mortgage balance, while giving you access to a pile of cash you can use for any purpose.

Last year, cash-out refinances reached $1.2 trillion, reports Black Knight. That's the highest level on record since 2005, and it represents a 20% uptick from the year before.

Given that refinance rates were very competitive throughout 2021, that's not too surprising. But while refinance rates are starting off 2022 higher, it could still pay to do a cash-out refinance. Here's why.

Tap that equity while you can

Right now, homeowners are sitting on a record level of home equity due to soaring home values. You may have more options for taking cash out of your home than you would at another point in time.

Imagine you owe $200,000 on your mortgage and your home is normally worth $250,000. If your home is now worth $330,000 because property values are up nationwide, it gives you an opportunity to borrow more if you need to.

In 2021, property owners tapped $275 billion in home equity. During the fourth quarter alone, more than 1 million homeowners tapped $80 billion. In spite of that activity, tappable equity available to mortgage borrowers grew by $446 billion in the fourth quarter. And that means that right now, many homeowners are likely to qualify for a generous cash-out refinance.

Borrow carefully

The great thing about doing a cash-out refinance is that it's a fairly easy, cost-effective way to borrow money. Even though refinance rates are higher than they were in 2021, they're still lower than the rates you'll typically see for alternatives like home equity loans and personal loans.

That said, if you're going to do a cash-out refinance, proceed with caution. The more money you take out of your home, the higher a mortgage payment you'll take on. Falling behind on those payments could put you at risk of losing your home to foreclosure. Even if the situation doesn't get that bad, late mortgage payments could result in serious credit score damage.

Still, if you have a specific need for money -- say, you want to pay off a pile of credit card debt, renovate your home, or start a business -- then now's a pretty good time to consider a cash-out refinance. Once home values start to drop on a national level, homeowners across the board will have less equity to tap. If you want to maximize that borrowing opportunity, the time to do so is now, while home values are still sky-high.