5 Most Prudent Reasons to Cash-Out Refinance

If you are like many Americans, you may have built up plenty of equity in your home in the last several years. You usually need to sell your home to get that money, but you also can do a cash-out refinance to enjoy some of your equity today.

A cash-out refinance replaces your current mortgage with a new one that has a higher loan balance. You take the difference between the two loans in cash.

Let’s look at a simple example:

If your home is valued at $300,000 and you owe $200,000, you have $100k in equity. With a refi, you can get some of this money in your bank account. If you wanted to take out $40,000, this amount is tacked onto your new mortgage. So, the principal on your new loan would be $240,000.

The great thing about doing a cash-out refinance is that it is your money and you can do whatever you want with it – the sky’s the limit! For those considering a cash-out refinance, below are some of the most prudent reasons to pull the trigger.

#1 Make Home Improvements

One of the most prudent reasons to do a cash-out refinance is to make improvements to your home that add value. Some of the home improvements that offer the most bang for your buck are:

  • Kitchen upgrades
  • Full kitchen remodels
  • Bathroom upgrades
  • New roof
  • Energy efficiency upgrades, such as new windows or solar panels

Remember to focus on upgrades that add value to the home. Adding a swimming pool might be what YOU want, but some buyers do not want the liability risk. On the other hand, almost every buyer likes to see a nicely upgraded kitchen with new flooring, counters, backsplash, and cabinets.

#2 Get a Lower Interest Rate On Your Home Loan

Another big reason to do a cash-out refinance is to get a lower interest rate. For example, as of March 13, 2020, 30-year refinance rates are averaging 3.940%. If you have an interest rate on your first mortgage of 4.5%, you can definitely save money on your mortgage every month with a refinance.

And if you have a mortgage from 10 years ago, you will be able to save potentially hundreds per month with a cash-out refinance.

#3 Pay Off High-Interest Debt

If you have a lot of credit card debt, you probably are paying interest rates of 18% or more. Here’s an example of how much money you can save with a cash-out refinance for debt consolidation:

Say you have $15,000 of credit card debt at 18% with a $300 minimum monthly payment. If you can get a cash-out refinance mortgage rate at 4%, your payment on that debt will be approximately $75. That’s a huge savings!

Just be sure if you decide to refinance, do not rack up that amount of debt again on your credit cards!

#4 Pay College Tuition for Your Child

If your adult child needs assistance to pay for college, using home equity to make tuition payments instead of using a college loan can be a prudent choice. Student loan rates can be as high as 7% or 8% in some cases. If you can get a 4% rate on your new mortgage, you can save a lot in interest payments.

#5 Invest in a Small Business or Real Estate

Another prudent reason to cash-out refinance is to invest in a small business or real estate.

Some homeowners decide to use their equity to buy investment properties. This can be a great move if you buy the properties under market value and do not go overboard on making repairs.

However, buying real estate investments with cash out is a risky proposition. The best move is to work with an experienced real estate investor and agent who can advise you on the best properties at the best price.

The Risks of a Cash-Out Refinance

Pulling cash out of your house can be a great idea if you do it for prudent reasons. See also cash out refinance pros and cons. But there are risks involved to consider:

  • If you are getting a higher rate with the new mortgage, many financial experts advise against refinancing.
  • Pulling out equity may stick you with private mortgage insurance (PMI) again. If you pull out 80% or 90% of your home’s equity, you may have to pay PMI again after you canceled it. That will add to your borrowing costs over the long term.
  • Increases the repayment period on your home. With a new first mortgage, you are starting over on house payments, unless you opt for a 15 or 20-year mortgage.
  • The repayment on the cash you take out is being spread over 20 or 30 years. So paying off credit card debt with your refinance may not save you as much as you thought.
  • Increases the risk of default. With a higher mortgage payment, you have a higher risk of losing your home if you hit tough financial times.

Final Thoughts on Cash-Out Refinance

There’s no doubt there are many prudent reasons to pull cash out of your home with a refinance. By adding value to your home with a remodel, you are effectively paying yourself back because you will make more money when you sell the home. And getting a lower rate on your mortgage can save you thousands in mortgage costs.

Talk to your mortgage loan officer and financial advisor to determine if doing a cash-out refinance is a prudent move in your financial circumstances.

References

Author: Bryan Dornan

Bryan Dornan is a financial journalist and currently serves as Chief Editor of Cash Out Refi Tips.com. Bryan has worked in the mortgage industry for over 20 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, Linkedin and ActiveRain.

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