THREE GREAT REASONS TO CONSIDER A CASH-OUT REFINANCE

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!

IS A DEBT CONSOLIDATION LOAN WORTH IT?

There are two debt consolidation scenarios that are gaining popularity in today’s economy:

1 – If you already own a home: a debt consolidation loan is typically where you trade in your lower-balance home loan for a higher-balance home loan.  You could then use the “cash-out” proceeds to pay off other debt.

2 – If you are buying a new home: a debt consolidation loan is typically where you reduce your down payment and use a bigger mortgage on the purchase of your new home.  The extra money you have left over could then be used to pay off other debt.Here are three questions you can ask yourself to determine if a debt consolidation loan makes financial sense for you:

  1. What’s my after-tax interest cost on each debt? For example, home loan debt may be tax-deductible while credit card debt is not.  Please reference IRS publication 936 and see a CPA or tax advisor for more details.
  2. What’s my “blended interest rate” before and after the debt consolidation loan? This is basically the weighted average interest rate you’re paying on all your debts combined.
  3. What will I do with the extra monthly cash flow? For example, if you roll in your car loan balance into the mortgage balance, you’d be spreading out your car payments over 30 years whereas your car loan would otherwise have been paid off in 3 or 4 years.  This might only make financial sense if you invest your extra cash flow or if you make extra principal payments on your mortgage.

Please contact me for more information or to run the numbers for your specific scenario!

TWO WAYS TO MEASURE THE BREAK-EVEN ON REFINANCING

break even point graph highligted in dictionary

According to recently released estimates, over 8 million American homeowners could benefit from refinancing at today’s low interest rates.  Here are three questions to ask yourself in order to figure out if refinancing makes sense for you:

1 – Interest & Cost Benefit:  What would be my interest and cost savings if I refinance into a lower interest rate?

For example, assume you could save $50 in monthly interest expenses if you paid $2,500 in closing costs to refinance.  In this case, it would take you 50 months to break-even ($2,500 costs / $50 monthly savings = 50-month break-even).

When you calculate your refinancing costs, you should include all the closing costs on the new loan, but you should not include the pre-paid interest or pre-paid items that go into your new escrow account.  That’s because you’ll get a refund of whatever is in your existing escrow account after you pay off the current mortgage.  In some cases, the lender may allow you to pay less closing costs in exchange for a slighter higher interest rate.

When you calculate your interest and cost savings, be sure to include the mortgage insurance that you may be able to reduce or eliminate by refinancing.  For example, assume your home value has increased from the time you purchased the home.  The mortgage insurance may be less if the mortgage balance only represents 85% of your current home value vs. 95% of your current home value.

2 – Cash Flow Benefit: How would my overall cash flow situation change if I refinance?

Here are three examples of when it could make sense for you to refinance even if your new interest rate is not that different from your current interest rate:

  • Assume you took out a car loan or racked up some credit card balances that carry interest rates that may be higher than current mortgage rates. You may be able to benefit from a debt consolidation refinance.  In this case, be sure to compare your current blended interest rate scenario vs. the new refinance scenario.
  • Assume you recently completed some home improvements, or you’d like to make some home improvements in the near future. Trading in your current mortgage for a new one through a “cash-out refinance” may be the way to go.  If you go this route, the IRS gives you a 24-month look back period and a 12-month look forward period to gain the coveted “acquisition indebtedness” tax deductibility status.  For more details, please see my article titled, Three Things You Should Know if You’re Pulling Cash-Out for Home Improvement.
  • Assume you have an upcoming large expense where it makes more sense to use a low-interest-rate mortgage vs. paying cash or liquidating other investments. In this case, you could use the funds from a “cash-out refinance” in order to preserve your cash and/or other investment assets.

Please contact me for details on any of these ideas, or to evaluate your mortgage options.