When Cash-Out Refis Make Sense
Assuming you can qualify for a favorable interest rate on this new loan, it might be a wise idea – especially if the maneuver improves your cash flow, adds value to your home or lets you jump on a great investment.
If you know that you will have income to pay back the new loan on time without putting your house at risk, then it might be time to talk with a financial professional to see if it’s a good idea.
With a cash-out loan, you are using the equity in your home. That equity can be looked at as a savings account for the future or for your retirement. If you vaporize all that equity with a cash-out refinance, your lose the potential cushion you have in case of a financial emergency. Once the equity disappears, you can’t get approved for a home-equity line of credit to pay for emergencies. And by reducing your equity, you will receive a smaller payday if you sell your house before that equity has had time to grow or you have paid off the new refinance loan. Estimate your spending and savings to understand how a cash-out loan can impact your overall long-term finances.
5 Common Uses For Cash-Out Refinances
By taking some of the equity you have built in your home to repair or improve parts of your home, you can possibly help keep some equity in it or even grow that equity. For instance, the 2015 Cost vs. Value Report from Remodeling Magazine shows that if you used your cash-out refi for a minor kitchen remodel that costs $19,226, you can recoup 79.3 percent of your costs right away if you sell the house. Make sure the improvement you are making increases the value of your house in the long run. After all, a cash-out refi poses risk to you. Adding a hot tub or swimming pool might not justify your investment.
Instead of opting for a cash-out refinance, you might want to consider a home-equity line or a personal loan for smaller remodeling projects. This way, the loan is for a shorter term. Closing costs are a disadvantage to a cash-out refi, but you don’t pay closing costs on a home-equity loan. Figure out what make sense. Talking to a financial planner or certified public accountant about your options can help you understand the good, bad and ugly of a cash-out refinance.
High-rate debt? Bad. Low-rate debt? Better. That’s the way to think about trading credit card debt for mortgage debt. Using a cash-out refi to erase credit card debt can be a savvy move. But remember, those lattes and payday loans Amelia Ohio movie tickets and dinners out haven’t disappeared from your balance sheet; you still have to pay for them. They are just now included in your new refinanced mortgage, and you’ll be paying them off a long time. Yes, the interest rate on a refinance with a cash-out loan is much cheaper than those high-interest credit cards. In fact, the national rate for new credit cards is about 15 percent, according to ‘s weekly credit card report. Interest rates on mortgage loans can be less than one-third to one-fourth of that rate.
Another advantage: Unlike credit card interest, mortgage interest is tax-deductible. So when you compare the difference between a low rate on a cash-out refinance loan to high credit card interest rates, it seems like a done deal. But is a new mortgage with cash-out the best choice for you? The answer would be no if you just plan on maxing out your paid-off cards again. Financial experts say that you need to get a whole new mindset once you pay off those cards. Learning willpower and better decision-making skills about credit necessary, or you will fall right back into the same situation. If you continue to carry hefty debt that strains your monthly cash flow, that puts your home at risk.