As rates dipped again last week, borrowers are re-visiting the notion of mortgage refinance. However, not all homeowners simply just want a “good rate,” but instead are considering how the equity in their home could help them consolidate debt.
The soft economy has left thousands of Americans using credit cards as life support. Now that the financial markets are showing signs of life and the unemployment rate appears to be deflating, consumers are starting to clean up their debt and get back on track.
This is a pivotal time for financial markets. Rates continue to remain low, while jobs are beginning to emerge. However as the economy strengthens rates will rise, closing this unique window of opportunity.
In an effort to get back on the straight and narrow, many homeowners are turning to mortgage refinance as a way to consolidate debt and lower monthly payments.
One possible mortgage refinance option is cash-out refinancing. Simply put, cash-out refinancing allows you to refinance your mortgage for more than you currently owe with the difference used to pay off debts.
The advantage to cash-out refinance (or any mortgage refinance) are the rates. The average 30 year fixed mortgage rate is 4.69%, down from 4.85% last week. The 15 year fixed mortgage rate is 4.57% down from last week’s 4.68%.
For years experts have said that rates will rise as the economy’s health improves. Additionally, with the news of Osama bin Laden’s demise, markets have rallied and the country appears to be headed in the right direction, possibly making low mortgage rates a thing of the past.
Cash-Out Refinancing vs. Home Equity Loan
If cash-out refinancing sounds like a home equity loan, you’re right. The concept is similar, however cash-out refinancing is a totally different animal.
With cash-out refinancing you are actually getting a new mortgage instead of a separate loan in addition to your first mortgage (as with a home equity loan). Typically, borrowers receive a lower interest rate on a cash-out mortgage versus a home equity loan, however you do pay closing costs with cash-out refinancing, whereas with a home equity, you don’t.
Ideally, cash-out refinancing works best for those who have steady employment, strong credit, manageable debt and a high-rate mortgage. Obtaining a lower rate for your mortgage, while giving you the ability to pay off high interest rate credit card debt may be your best option.
Additionally, instead of making monthly payments at a higher interest rate, paying off debt at a lower rate may also be tax deductible.
To determine if cash-out refinancing is best for you, use a mortgage calculator to help you break down the financials.
Cash-Out Refinancing Considerations
Although cash-out refinancing may be an option for some, borrowers should understand that declining property values and tough lending guidelines have made cash-out refinancing more challenging today than in the past.
Shop mortgage brokers and compare quotes to determine which lenders best suits your needs. Also, borrowers should consider certain aspects of cash-out refinancing:
- Your home’s equity is reduced. Especially in a down market, your equity is lowered which may extend the length of your payments
- Because you are financing more than what you owe, your mortgage payment may be higher than before. Although rates are low, you must be certain you can handle a higher payment
- Cash-out refinancing is smart when applied to important events such as getting out of debt, a home addition or a college education
Consider that you will be making payments for the next 15 to 30 years. For something like getting out from underneath crippling debt or financing a college education, long-term payments may make sense. However, think about whether you want to spend 15 to 30 years paying off a European vacation or new car expenses.