There are all sorts of “recommendations” on doing a cash-out refinance that homeowners will receive along their journey. Most of these will focus exclusively on various ways that homeowners may use their home as a piggy-bank to consolidate debt, do home improvements, or meet other financial obligations.
I believe that all of these recommendations are either misinformed or solely for the benefit of someone who wants your money.
The correct way to look at doing a Cash-Out Refinancing is to look at your mortgage in terms of “Lifetime Interest Cost” and do a Needs Analysis. The core ideas behind this approach are:
- We want to pay-off our mortgage at some point – preferably in a timeframe no longer than 30-years
- The combined total of all the interest we pay on our home and other debt is the metric to evaluate the benefit
From these two ideas comes a framework for determining whether you, the homeowner, will benefit from a Cash-Out Refinance:
If the total length of time for your mortgage isn’t increasing AND if the combined total of all of the interest we are going to incur is less than the what you have presently, it’s worth investigating further.
But… there’s more to it than that.
Sometimes, we just need money. Money to make a major repair, pay a large unplanned expense, reduce our monthly expenses, and the list goes on. The consequences of these decisions, however, are often overlooked because we’re not able to look at the whole picture or we’re being pressured by a salesman.
The Pros and Cons are too varied and involved to make a complete chart but here are some of the big picture elements that should be considered when evaluating the merits of a cash-out refinance.
|Consolidate credit card debt||Lowers your total payments. Mortgage interest may be tax deductible where credit card interest is not.||Increases the debt on your home. Converts unsecured debt to debt secured by your home. May extend the length of time you will pay interest on the credit card debt.|
|Home improvement||May add value to your home and/or make your home more appealing. Provides funding for essential maintenance||Rarely get 100% of the cost back through increase in value. Increases monthly payment. May make it harder to sell if market declines.|
|College funding||Provides ready source of funds to pay for children’s education. Lower interest rate. Mortgage interest may be tax deductible.||Risk of losing home if unable to afford payments. Transfers responsibility from children to parents.|
|Investment/Business||Ready source of funds at a low rate to make a major investment or start/fund a business.||Risk of losing home if unable to afford payments. Home equity should never be used for investing in stocks.|
My hope is that the insights provided by this article helps you see the benefit of speaking with a mortgage professional – one who is more interested in your financial well-being than his or hers. Please contact me for a free mortgage review to learn whether a cash-out refinance is a sound financial decision.