Interest rates on home loans are near their best levels of the year, while home values in many parts of the country have increased. In this environment, many homeowners are considering a “cash-out” refinance. This is where you pay off your old mortgage by getting a new mortgage with a higher balance. The difference between the old loan and the higher-balance new loan is called “cash-out.” That’s because you’re walking away from the new closing with cash. Here are three reasons why you may want to consider a cash-out refinance:
- Pay off other debt that may carry a higher after-tax interest rate. For example, the interest on up to $100,000 of cash-out proceeds may be tax deductible if you itemize your deductions and if you’re not subject to the Alternative Minimum Tax (AMT). Please reference IRS publication 936 and see a CPA or tax advisor for more details.
- Make home improvements – keep in mind that there are some home improvements that may add to the value of the home or at least help you maintain its value. These may include an addition to the house, a new kitchen, and upgraded landscaping.
- Prepare for a large upcoming expense – increasing your mortgage balance could be a budgeting strategy if you have a large upcoming expense that would otherwise cause you to go into credit card debt. These expenses can include unexpected medical bills, new furniture or major appliances.
The great thing about today’s low-interest rate environment is that your monthly payment on the new mortgage may end up being very close to what you’re paying right now. Please contact me for more information or to run the numbers for your specific scenario!