Should I take cash-out through refinancing?

A cash-out refinance is an alternative to a standard home equity loan that many people utilize for expensive transactions instead of using their cash savings. If you need to consolidate debt, repair, or renovate your home or pay for college expenses, you might want to consider cashing out on a portion of your home’s equity.

What is cash-out refinancing?

A cash-out refinance replaces your existing mortgage with a new loan that is equivalent to your home’s current appraised value, which should be more than what you presently owe on your house. You then take your new loan amount and its current appraised value, subtract what you owe from your previous mortgage and the difference goes to you in cash. This is what sets it apart from traditional refinancing, which replaces your existing mortgage with a new one for the same balance and a better interest rate. It’s possible that a cash-out refinance may get you a better interest rate, in addition to the cash, and it typically comes with a lower interest rate than a home equity line of credit or HELOC.

Once your cash-out refinance has been completed, you can spend this cash as you see fit, though it’s always best to use it for expenses that give you a return on your money. Paying off credit card debt can improve your credit score and eliminate high-interest rates, which makes it a good use for the money (as long as you don’t run up your credit card balances again).

Many homeowners use the cash for home improvements to increase the value of their home, which helps rebuild the equity you took out for the refinancing. Additionally, the home improvement expenses may qualify for a mortgage tax deduction.*

If you have a child that is considering student loans to pay for college, be sure to check their interest rates versus what you can obtain with a cash-out refinance. Sigue leyendo →