Lifestyle

Should you get a cash-out refinance this spring for money this summer?

Written by

Jonathan McFadden

Posted

March 15, 2019

The weather is warmer. The days feel longer. And the kids will be out of school before you know it. Spring is here; summer is coming. What are you going to do?

Family vacation? Visiting relatives? Sending the kids to summer camp?

No matter how you decide to spend your summer, chances are, you’re going to need extra money to fund it. If you’re a homeowner with decent credit, you may want to consider getting a cash-out refinance.

With a cash-out refinance, you can swap your existing mortgage with a new, larger one and get the difference between the two loans in cash. You can get that money in a lump sum and use it to pay for anything you want — trips to the beach, excursions to Europe, installing a new pool, you name it.

Before you dive in cannonball-style, here are some things you should know — good and not-so-good —  about cash-out refinancing.

Interest rates could be lower

A cash-out refinance can offer you lower rates because the money is secured by your home and it’s considered a first mortgage. That’s different from home equity loans, which carry higher rates because they’re second mortgages. You might especially benefit from lower rates with a cash-out refinance if you purchased your home years ago when rates were higher than they are today.

You’ll pay closing costs – again 

A cash-out refinance means getting a brand new mortgage. And just like with your first home loan, you’ll have to pay upfront and closing costs that can easily reach thousands of dollars. Be prepared to pay about three to 5 percent of your home’s mortgage. Word to the wise: make sure the benefits of a cash-out refinance outweigh your closing costs.

You might be able to deduct the interest

You may be able to lower your taxable income by deducting interest from your cash-out refinance. Check with a tax expert to see if your cash-out refinance could land you a bigger refund check come tax time.

Your home is collateral

Just like with your first mortgage, a cash-out refinance treats your home as collateral. If you fail to pay your mortgage, the lender can seize your home in foreclosure. Remember, a cash-out refinance gives you a new mortgage but does not absolve you from satisfying the debt. You still have to pay it back!

You can consolidate your debt

Perhaps your summer plans have nothing to do with swimming pools or extravagant vacations. Maybe you want to enter the fall holiday season with less debt on your shoulders. A cash-out refinance can help make it happen. You can use the money you get from a cash-out refinance to pay off high-interest credit cards and save yourself thousands in interest.

You can trust where the money comes from 

Money you get from a cash-out refinance comes from you. OK, it comes from your home, but it’s generated from your equity, which is the value of your home you actually own as you’re paying off your mortgage. Basically, you’d borrow from yourself. It’s money you’ve already worked for, and it’s coming from one of your most trusted assets. Why not use it?

What next?

Calculate the costs of a cash-out refinance before you make a commitment. Refinancing could be the key to an awesome summer, or it could place a bigger burden on your finances. Make the smartest decision for you this swimsuit season!