Use a Cash-Out Refinance to Improve Your Finances
Do you want to improve your financial situation? The primary reason to consider a cash-out refinance mortgage is that you want to improve your financial situation. Due to rising home prices, many homeowners now have equity in their home which can be used to finance essential projects.
The main reasons for taking out a cash-out mortgage are debt consolidation, home improvements and repairs, medical bills, and college expenses.
When considering the reasons to take out a cash-out refinance ask yourself these questions:
- Do I need money for a substantial financial reason and not a frivolous expense?
- Is my credit score sufficient to refinance my home?
- Do I have equity in my house?
The two most important factors to consider are interest rates and monthly payments. Here are two simple guidelines to help you determine if a cash-out refinance can enhance your financial situation:
- Terms of the mortgage: Are you improving the conditions of your current mortgage? Is it a good idea to lengthen the time to pay back your mortgage? Is the new interest rate lower, which guarantees overall savings, or is it higher, but still worthwhile for the time frame that I want to keep the loan?
- Monthly Payment: Is the new monthly payment affordable? Can you afford to pay back your current mortgage and add new debt on top of it?
Reason #1: Cash-Out Refinance for Debt Consolidation
Consumer non-mortgage household debt is at record highs. According to the Federal Reserve G19 report, as of June 2018, total outstanding (hon-housing) consumer credit is about $3.9 trillion. Many households are struggling with monthly debt payments and are looking for ways to save money and get payment relief.
There are many different ways to consolidate debt. A cash-out refinance is a popular way to combine your current mortgage with your credit card debt. If you have built up credit card or other personal unsecured debt and are struggling to make monthly payments, then readjusting your debt load can bring immediate financial relief. In most cases, the most critical factor is payment relief.
Based on the Freddie Mac Primary Mortgage Market Survey, 30-year fixed rate mortgage rates increased from under 4% at the beginning of 2018 to over 4.5% as of July 2018. However, mortgage rates are still at historical lows.
Here are a few possibilities to consider:
- If you can refinance your mortgage into a lower interest rate (and check a no-fee mortgage to compare), then it is a no-brainer. Your cash-out mortgage will help you save on both your mortgage and your credit card high-interest debt.
- If you can afford a higher payment, then check into a shorter period loan, such as a 15-year loan. Or, if you have a lot of equity and a low loan to value ratio (75% or less), then you can consider an Adjustable Rate Mortgage and save more in the initial interest rate period.
- If mortgage rates are higher than your existing mortgage, then consider extending your loan into a 30-year payment schedule and lower your monthly payment. You immediately benefit from debt payment relief. You can save money from the cash-out refinance even with a slightly higher interest rate on your new mortgage, due to higher interest rates on your credit card. The savings will be most substantial in the early years of the cash-out mortgage. (Check out this mortgage payment comparison calculator to see how higher interest rates affect your monthly payment).
- Many people pay off their mortgages early. Even with a higher interest rate on your new mortgage, you can save money on a cash-out. Increase your savings by taking out an Adjustable Rate Mortgage (ARM).
Reason #2: Cash Out Refinance for Home Repairs Improvements
Maybe you are one of the many households that enjoy their home and neighborhood. Excellent schools, near to great cultural activities, or the view is spectacular. But, on the other hand, you need an office or an extra bedroom. Or perhaps, you have pushed off doing vital home repairs, such as a new roof, or new flooring and kitchen.
According to the Shiller-Case Home Price Index, home prices in the US as of June 2018 rose by about 48% since hitting a low point in February 2008. Home prices are now 9% more than the previous record high in 2007.
Rising home prices make it possible for many households to do a cash-out refinances. Instead of the extra costs of buying and selling a home, you can refinance your mortgage and take out cash to do all of your home repair and improvement projects. When comparing your options look at all of your options. Is the new mortgage rate lower? Can you get a lower rate by taking out a short-term mortgage? Many people who have built up equity have already paid a lot of principle on their current mortgage.
Do you need to lower your mortgage payments? Maybe now is a good time to cut back on your overall mortgage payments. Make sure that your new cash-out balance has affordable payments. Even if your interest is slightly higher, a lower monthly payment can make it worthwhile. Compare the cash-out refinance to other options such as a Home Equity Loan or HELOC.
Lastly, don’t count on the home improvements to add dollar-to-dollar value to your home.
Reason #3: Cash-Out Refinance to Finance College Expenses
Anyone looking to put a child through college knows that tuition, room and board, textbooks, and computers are expensive. Did you know that according to the The National Center for Education Statistics (NCES) the average annual cost for a private 4-year Institution was $41,468 for 2016-2017? While an In-state Public 4-year institution was cheaper, it was about $19,488 per year.
Federal student loans and grants are a crucial way to finance college. You can find essential information at the government website. Parent Plus student loans exist but carefully review the terms including interest and monthly payment. Those loans often have higher interest rates and a shorter payment period than a mortgage.
Many families look to a cash-out refinance as a way of lowering their monthly payments and provide themselves with the financial cushion to pay for part of a college education.,
Other Reasons to do a Cash-Out Refinance
There are many other reasons that households take out a cash-out refinance mortgage. Verify that adding new debt improves your financial situation. Your home is the single most important, if not the most important asset you own. Buying a house and paying down your mortgage is a significant savings vehicle.
However, there are many other reasons that people take out a cash-out mortgage. Some want to improve their asset portfolio by purchasing an investment home, second home, or put more money into a retirement or investment account. Tapping into home equity can be a lifesaver for some households. The extra cash can be used to cover a wedding, emergency expenses, divorce costs, or medical bills.
One thing to avoid is to use a cash-out refinance for whims. Unless you have a lot of equity in your home and a stable financial situation, taking cash out of your home for a vacation is generally a bad idea. Remember to protect your home and finances and use a cash-out refinance to improve your financial situation.
If you built up equity in your home and need more cash check out if a cash-out refinance If you have equity in your home and need extra cash then check out your options. Compare cash-out mortgage options and see how you can get an attractive rate and affordable monthly payments. Don’t forget to ask your lender about home equity loan options.