On the surface, applying for a cash out refinance mortgage sounds like a no-brainer. You have the potential of a lower interest rate, plus you walk away with some cash. But there are complexities to consider, factors to fuss over, and numbers to crunch.
Here are some of the major questions you need to examine in order to determine if a cash out refinance is the right move for you.
1. How long do you plan on staying in the home?
As will all refinances, it only pays to move forward if you give yourself ample time to recoup any closing costs and fees that are tacked onto the new principle. This could take a few years.
Also worth noting is that the less equity you have in the home because you’re taking out cash against the home value, the harder it will be for you to sell should you decide to move on. If you plan to stay in your residence for the long haul, however, then over time, you’ll regain more equity and won’t be tied down.
2. What are you planning to do with the funds from the cash out?
In many minds, it might seem like this is free money to take that trip of your dreams, or splurge on the Sweet 16 party your daughter really wants. But there is no such thing as free when it comes to money that you’re borrowing against your home. In other words, that amount will be rolled into your new mortgage principle, and therefore, you’ll be paying interest on it for the next 30 or so years (or however long the loan term is). Is that sports car really worth it?
You want to use the money toward something that is really meaningful or is a sound investment. It could be a major home improvement that will add value to your home, or you might need it for the health care costs of someone in your family, which is not something you can skimp on.
Perhaps you still have some other lingering debt that you’d like to take care of. Remember, the lender doesn’t care how you use the money. Just make sure that it makes financial sense and helps you with your goals in some way.
3. How will our monthly payments be affected?
The idea of a refinance is to make life easier for yourself, usually in the form of saving hundreds of dollars on your monthly mortgage payments. Depending on the LTV ratio you’ll have, how drastic of a decrease in loan interest rate you can qualify for, and how much cash out you’re taking out, you may end up with payments that aren’t all that different. And if you already refinanced in recent years, the interest rate drop might not be dramatic enough to really impact your bill.
This is where your trusty old calculator comes in, as well as the advice of a few mortgage specialists who could help you weigh your options. If a reduction in your monthly payment is in the cards, that could be the deciding factor for you.
Reducing your expenses could help you achieve anything from cutting back on work hours to raise children, to building an emergency fund with the extra money.
4. Are you ready to go for a cash out refi now?
While you don’t want to necessarily rush into a major decision like a mortgage refinance, you should be aware that experts are saying that mortgage interest rates are likely to begin increasing in 2015. That being said, the longer you wait, the less beneficial a cash out refinance might be for you.
5. Would a home equity loan make more sense?
If the numbers just aren’t working for you and it’s really more about gaining access to cash, you might be better off getting a home equity loan. This will be a second loan independent of your mortgage, but there are no closing costs to contend with.
Also, you have to consider how many years you are into your current mortgage. If you are more than halfway through, it’s probably not a good idea to start from scratch since most of your monthly payment is being applied toward the principle balance at that point. A reduction in interest rate wouldn’t really help you much.
Apply for a cash out refinance while rates are low
If the conditions are right, cash out refinance mortgages can be a great opportunity to lower your payments, gain access to cash, and positively impact your overall financial big picture.