6 tips for cash-out refinancing

Posted by  on Mar 05, 2015

Today's mortgage environment is pretty favorable for cash-out refinancing. Current mortgage rates are lower than they have been at nearly any other time in history, and recovering property values have helped homeowners build equity in their homes.

In other words, cash-out refinancing is there for the taking, but there are some tips you should consider if you want to make sure you use it wisely.

Tips for cash-out refinancing

Here are some tips that can help you make efficient use of cash-out refinancing:

  1. Mortgage debt may be the cheapest form of financing available. Falling refinance rates have given homeowners an opportunity to save money on their existing mortgages, but what is even more dramatic is the difference between mortgage rates and other forms of consumer credit. Mortgage rates are generally lower than rates on car loans, personal loans, and credit cards, so if you need to borrow, a cash-out refinance can be relatively cheap way to do it.
  2. Home improvement is a great fit for cash-out refinancing. Cash-out refinancing is especially appropriate for home improvement projects because, while you are borrowing against equity in your home, you are using the money for a project that can add to or at least help preserve the value of your home. Also, lasting improvements are a good match with the long-term nature of mortgage refinance.
  3. Cash-out refinancing can help with debt consolidation if you have a sustainable budget plan. Because mortgage rates are so low relative to other forms of financing, cash-out refinancing is also often recommended as a tool for debt consolidation. There is merit to this, but with one important caution: Make sure you have a plan in place to rein in your spending and pay down the debt over time. Otherwise, you will just dig a deeper hole for yourself, and put your house at risk in the process.
  4. Credit history can be the key to cost. If you are looking at cash-out refinancing as a debt-consolidation tool, the viability of this approach might depend on how bad your credit situation has gotten. If you cannot get a low enough interest rate to save money on your existing mortgage, you might be better off just borrowing what you need with a home equity loan rather than via cash-out refinancing.
  5. Measure cost impact after all closing costs. As suggested above, cash-out refinancing compares favorably with a home equity loan if you can save money on your existing mortgage rate in the process. Just be sure to measure those savings after all fees and expenses involved in refinancing, and not simply by comparing interest rates.
  6. Don't use your house as an ATM. Home equity may be a cost-effective source of credit, but be careful about getting into the habit of tapping into it. The ultimate goal should be to pay down your mortgage, so you can build wealth and reduce your housing costs in retirement.

If you have equity in your home, cash-out refinancing at current mortgage rates can be a ready source of relatively low-cost refinancing. However, while obtaining some cash back may be the most immediate goal, you should not forget about other principles of refinancing, nor about the long-term goal of paying off your mortgage.


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