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Cash Out Refinance: Spending Wisely


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TERMINOLOGY

There are many reasons homeowners choose a cash out refinance. A positive to a cash out refinance is the tax deduction that comes with mortgage interest and prepaid points. A negative is the fact that the new debt will be spread out for thirty years or the life of the loan. You really have to decide if the reason for the cash out refinance is good enough to pay for over the next 30 years. There are good reasons for taking equity out of your home, but there are also some very bad reasons. Taking equity for frivolous expenditures like vacations and new cars is very risky and not a smart financial move. However, for some expenditures, it is worth borrowing from the equity in your home.

Home Improvements

If you need some major home repairs or need to make upgrades to outdated rooms in your home, then a cash out refinance may be a good choice. Because your mortgage is a tax write off, it is wiser to use this method than a credit card. Also, some of the money you invest into upgrades and repairs will add value to your home later.

Debt Consolidation

Debt consolidation is a very common reason for a cash out refinance. The interest rate on a mortgage is much lower than the rates on credit cards or personal loans. This will mean immediate savings every month. Also, there is an advantage to having everything rolled into one payment. There are fewer bills to remember to pay, fewer late charges and fewer checks to write. Again, a mortgage and some closing costs are tax deductible, whereas credit card debt, auto loans and personal loans are not. When using a cash out refinance to pay off high interest debt, you need to be very disciplined. Many borrowers charge up credit cards with things that they did not need and then roll the debt into their home. Remember, the debt is not actually gone. It has been moved from credit cards to your mortgage. It is very easy to charge those cards back up and possibly not have any equity to do another refinance. So, you must spend wisely and only do a cash out refinance for debt consolidation if you are disciplined enough to keep from ending up in a similar situation.

College Expenses

If you or a dependent are in college and need cash, a refinance may be a good option. Federal student loans have pretty low rates but often are not enough to cover tuition. Private loans can have very high rates and are often adjustable. If deciding between a private loan or a refinance, a refinance may be more cost efficient. Both loans are tax deductible. A private student loan often has high payments due to the higher rates.