Cash Out Refinancing Lowdown

Refinance Your Home Improvement

-- Pushpa Sathish, Staff Writer

Improving your home has a double benefit – you not only add value, you also get to live in better and more comfortable surroundings. No money for improvements? Well, if you’re considering a cash-out home loan, you can shop around for one that comes packaged with a home improvement option.

Again, there’s a twofold advantage here – not only do you get the money to renovate or add to your home, but you may also get a lower interest. That’s because your lender also gets something out of the deal – your equity goes up the moment you improve, adding value to your collateral for the loan. So go ahead, use some of the money for your debt consolidation, and instead of splurging the rest on frivolous expenses, use it wisely to enhance and add value to your most valuable asset.

Tax Benefits and COR

Let’s say you’re in debt, and the interest you pay is not tax-deductible. In this case, you can refinance your home, and use the extra money to pay off this debt. If it’s your main home, you can get as much as $100,000 more than your mortgage amount, and deduct the interest due even before paying back the loan.

The benefits are twofold – you get rid of a debt with high, non-deductible, interest rates, and also get tax benefits on your home loan repayment. For more details on interest deduction, follow this link. 

Selling Your Home to Raise Extra Cash?

-- By Pushpa Sathish, Staff Writer

Low interest rates and low borrowing costs leading to attractive mortgage refinances on one side, rising real estate prices contributing to appealing home sales – which of the two options offers the most benefits?

Refinancing is the better option when the choice of moving away and finding a new home is not as alluring as the money that comes in from the sale of your home. Renting may not be as cheap as you thought, you lose your social and cultural circle, commuting to and from the workplace becomes an added hassle, and finding new accommodation to suit your needs may not be easy. Your increased home equity will provide you with extra cash in hand to renovate your home and add value to it, or to spend as you please.

Selling your home as a way to cash out is a good option when your home value is high, when you retire, or when your kids move away and you no longer need such a large place.

Planning to get your mortgage refinanced? Be careful!

There are several agents out there who can cause a lot of trouble for the borrowers. Take the example of Catherine Chaney who was earning around $1,600 per month and her broker advised her to get her house mortgage refinanced. He told her that she could get extra cash at a lower rate of interest by getting her house refinanced. She could then use the cash for making improvements in her house.

This was the same buyer who has helped her buy her house, a nice cozy yellow bungalow south of Shaker Heights. All she had to do was declare that she was earning close to $3000 per month. This act of deceit helped her get the refinance (that she originally did not aspire for). But now she had to pay interest at the rate of 9% as compared to the earlier 6%. Since the amount involved was higher her monthly payouts were more. Add to this was the loss of tax benefit that she had been receiving earlier. She lost her tax rebate because she had borrowed far more than her home's actual value. Mother Jones gives some more instances like this so as to help you become more cautious.   

To Cash out Refinance or not! That is the question

Some things look good on paper but are better not tried in actual life. Loan Consolidation is one of these. When you are offered the option to lower your monthly payment, through cash out refinancing, it may sound very exciting. Remember there is nothing like a free lunch and that you have to pay. However harmless the proposal may look, there is always a loophole that may end you in trouble. When you stretch your payment term and bring down your monthly payment, what you are doing is in effect paying much more than you originally set out for.

The truth of life also is that – once a spender, always a spender. No matter how much one may decide to do away with the unnecessary ‘binging’ very few people actually are able to kick off their habit t spend when they can actually save. Therefore it is important to gauge your requirement carefully before taking the plunge. Bankarte explains:

When debtors use home equity to pay off their bills, they usually swear to God they'll never carry a credit card balance again; but they forget to change their spending habits, and they forget to save for emergencies and big-ticket items. When the car needs a new transmission, or they "need" a vacation, the plastic get resurrected and the debt cycle resumes.

Cash-Out Refinancing Or Home Equity Loan?

If you have wondered about the differences between cash-out refinancing and a home equity loan, and when to choose either option, well, here are a few salient points that will help:

• A home equity loan is a discrete loan in addition to your first mortgage, while cash-out refinancing replaces your first mortgage.
• The interest on cash-out refinancing is usually less than that on a home equity loan.
• On the negative side, you would end up paying closing costs in the process of refinancing your loan, which is not the case for a home equity loan. 
• A home equity loan works out cheaper if you borrow more than 80 percent of the value of your house in a cash-out refinancing option, in which case you will have to pay private mortgage insurance (PMI).

Cash Out Refinancing - What To Watch Out For

Do you have college tuition, credit card debt or home improvements to be funded? The first thing you can do is to try and refinance your mortgage. However if you need the cash fast, you should try cash-out refinancing.

Cash out refinancing is the process of refinancing your old mortgage for a new one and that makes you owe more but you pocket the difference between the two.

To illustrate this better let’s take an example. If you owe $50,000 on a house that is worth $90,000, you can refinance the mortgage for $90,000 and keep the extra $40,000 to spend as you wish. It sounds too good to be true, right? However, you can do exactly that and go ahead and use the money for that home improvement project that has been long over due.

Some snares to watch for while cash-out refinancing…

1. Interest rates on the refinanced mortgage must be a lower rate to really reap the advantages of cash-out refinancing. If this is not the case you should refinance only if you really need money badly.

2. The money you get from cash-out refinancing is an amount you really never thought you had and in a way it is true because you will be continuing to make payments for this cash for next 30 years. All this makes this amount a valuable one, so use it accordingly. Families tend to treat this money as a lottery and spend it on a luxury car or some other wild dream and this really should be avoided.

3. Another thing most people don’t realize is that there are closing costs that can even run into hundreds or thousands while closing the mortgage. This is a huge drawback to keep in mind while refinancing your loan.

Steep closing costs may eventually force you to take a home equity loan unless you are that desperate for hard cash. Let me remind you that home equity loans don't have any closing costs!

Tax deductions that can be availed while refinancing

Most of us after doing our taxes for the year realize that we've invariably forgotten some deduction or the other. Let's talk about tax deductions and refinancing. This is an area most people either forget or are not aware of. The amounts so deducted may not be huge but every little bit can help. Most of us by now have refinanced our homes at least once some have done it more than once so this is useful information for most of us.

Deductions meant here are about the points you pay to refinance your home. These points can be deducted every month over the span of your new loan. So if you took a new mortgage for a 20-year term on June 1 2005 you would have paid $2,400 in points. You are entitled to write-off $10 a month of this and for the year 2005 it would be a total of $70. Thereafter $120 each year till the whole amount is deducted. Did you know that points on your old loan could be deducted in the year of the new refinancing? So taking the same example above, you can write-off the whole $2,400 in the year 2005. Crucial points most people miss while doing their taxes.

Cash-Out Refinancing should ideally be an SOS option

Cash out refinancing makes ready money available for various reasons, such as home improvement, college tuition, etc. Interest rates drop considerably in comparison to the original mortgage, but most people don't realize the hidden dangers. Interest rates charged on a mortgage is not always at a fixed rate.

Adjustable rates of interest is risky because your mortgage rate will fluctuate according to current market trends, fixed rates of interest will ensure the pay out remains the same. Adjustable rates of interest may not be so beneficial when interest rates fall. If you react by taking out a bigger loan and extracting cash, you're condemning yourself to carrying a heavy debt burden for years to come

You need to carefully look at how you plan to spend the money from cash-out refinancing. If you're going to make payments for 15 or 30 years, it's advisable to spend on enduring things like an addition to the house that will increase its value, potentially lifesaving experimental medical treatment, or to start a business.

The 2006 trend indicates a slowing down housing market. Therefore taking a second loan to do up ones house with an intention to take cash out of your increased home equity is not prudent. It is predicted that as many as 72% Americans are not likely to touch their home equity loan this year.

Several states are reporting that home improvement projects intended to milk more money of people's homes is slowing down. There's a drop in cash-out refinancing. Home equity loans have also started to decline. Though home improvement projects are being scaled people are still considering re-modeling in a smaller scale. However, unless a household really needs the extra cash today, cash-out refinancing may not be the best choice. Ask yourself - Do you really need the extra cash? 

Cash Out of the house

According to the Mortgage Bankers Association, out of all mortgage applications, Refinancing accounts for 44.8 percent. Mortgage rates have been very low for years. People are now refinancing to take cash out of their homes. They are doing so because they had taken high-interest loans few years ago. However, in the whole process, they are just increasing their debt.

Home prices have soared in recent months. By taking out a new loan, the homeowner can convert the equity into cash. Today, the average 30-year, fixed-rate mortgage charges about 5.6 percent, which is very low as compared to personal loans. chron.com reports:

Moreover, since the repayment is spread over decades, the monthly payment is lower than it would be on most other types of loans. And the interest payments are tax deductible.