Cash-Out Refinancing..is it worth it?? (1 Viewer)

[Alf S]

On a whim my wife called our bank (where we have our mortgage) and asked our agent if the lower interest rate would be wise for us to switch to...it's about 1% lower than what we have now. Note: we've lived in this house for 6 years now with a 30 year loan.

My wife also asked how we could do all this and have some extra cash for home improvements. Our agent suggested the cash-out refinancing method. We had not heard of it and read up on it and it seems like a POSSIBLE method of refinancing for us.

It would save us $100 a month off our monthly payment and give us enough cash to buy new carpet and update a few other things on the house.

I've researched this a little but wanted to hear if anyone has first hand knowledge of this form of refinancing? What was your experience? Was it worth it?

Thanks for any input.

Alf

 

[Tom Meyer]

all that really means is that your property has increased in value and they give you a mortgage for the market value of the house (or some percentage thereof) instead of just what it takes to pay off the old mortgage. this new amt coupled with the current lower interest rates could lead to a lower payment. Of course, you'll then have that few thousand you took out to buy new carpet, etc... amortized over another 30 yrs, which would probably mean more interest in the long run. Another route could be to refinance without taking any $$ out and then get a home equity line of credit a little later.

I'm sure there are other gotchas but this is just my first reaction.

 

[Eric_L]

There are no real 'gotchas', only tradeoffs.

First issue is cost. If you are only saving $100/month but the loan cost $2400 (usually just added to the loan amount - not out of pocket) then you have over two years before you break even. Yes, OVER two years. Why? Time value of money. That $2400 put in a 2 yr CD would earn interest at around 2%. So you would have to consider that also as cost.

As a rule of thumb a refi to lower payments isn't worthwhile unless you drop about 2% and the closing costs are no more than 2% TOTAL. (not just the points)

Now - when you are looking to get cash out for home improvements it is a different story. It could be much more economical and convenient than buying a new home.

The things to consider would be how much money you will be getting out and what will you be doing with it. If you only take $5000 out - even if your closing costs are only $1200 then it is a poor choice. (unless you are dropping the rate by 2% also) However, if you are taking out $20,000 and dropping your rate only 1% then it makes good sense even if the closing costs are somewhat higher.

Also worth considering is the subsidy you get from the government for having a mortgage. (tax deductions) For the average homeowner it knocks about 20% off the net interest costs.

It is a bad idea in most cases to do a cashout to payoff consumer debt (credit cards, cars, etc) A equity line of credit serves that much better - along with some credit discipline.

It is also a bad idea to refi if you may move in 3-5 years.

One more piece of advice - don't over-improve your house. You never want to own the nicest (or the worst) house on the block from a $ perspective.

 

[Philip Hamm]

That bears repeating.

Alf,

If you're planning on staying in the house for more than say about 5 years and can save a point on your loan, a refi with cash out is IMO a perfect choice. That's -exactly- what they are for.