Cash Out Mortgage Refinance Considerations

If you are willing to give up some of the equity you have build up in your home, cash out mortgage refinancing can greatly accelerate your debt elimination process.  However, before committing to this debt consolidation method many factors must be considered including:

• Interest Rate – When applying for mortgage refinancing the new interest rate is the most important consideration, so refinancing only makes sense when interest rates are low.  The sole reason to refinance a mortgage is to achieve savings through a lower interest rate.  Keep in mind that even a small decrease in the interest rate can add up to big savings in the long term.

• Home Equity – Home equity is the difference between the appraised value of your house and how much you owe on your mortgage. The more equity you have in your home, the lower the interest rate that you can qualify for and the higher the amount that you can cash out for debt consolidation.

• Savings – Besides debt consolidation, the whole point of refinancing your mortgage is to achieve savings by taking advantage of a low interest rate. Homeowners must consider all the costs involved and weigh them against the benefits of having a lower interest rate to decide whether refinancing is worthwhile.

• Staying in Your Home – How long you plan to live in your home may justify the cots of refinancing. If you plan to live in your house for at least five years, the benefits you gain from the lower interest rate may justify paying high upfront fees, closing costs, and points.

• Pre-Payment Penalties – You may be charged a pre-payment fee for paying-off your mortgage early.  If you have a fixed rate mortgage that has been outstanding for more than 3 years, pre-payment fees are usually omitted. With an adjustable rate mortgage, you may face substantial pre-payment fees if you refinance within the first couple of years.

• Refinancing Fees - Some lenders are willing to omit standard refinancing fees such as closing costs, legal fees, title search fees, application fees, and appraisal expenses.  This can save you two or three thousand dollars upfront but at what cost? The lenders who omit these fees compensate by charging higher interest rates and in the long run you might be paying many thousands more. Consider how long you plan to live in you house and explore both options of paying for refinancing fees yourself or not.

• Income Tax Return - The interest you pay on loans that are secured by your house is tax deductible. With the lower interest rate on your new refinanced mortgage you will pay less interest and therefore increase your tax payments and decrease your total tax savings. 

• Paying Points for Lower Rate - If you have a little more cash on your hands, you should consider paying points for a lower interest rate.  When refinancing a mortgage, the lender normally offers a variety of interest rates with different numbers of points attached to them.  To get the desired interest rate you must pay its points, which normally range from three to six. One point equals 1% of the total loan amount and can get quite expensive for larger loans. Each point you pay lowers the interest rate by approximately 1/8^th to 1/4^th of a percent. In general the lower the interest rate the more points the lender will charge. 

• You can save money by analyzing the various interest rates and the points they come with.  Notice that points become more expensive for shorter loan terms. Thus, if you are planning to live in your home for a long period of time and refinance your mortgage for the long term, it might be worth it to obtain a lower interest rate by paying more points as it will save you money in the long run.  

• If you are short on cash, then you have the option of finding a company that does not require you to pay any points upfront. In this case, points are added to the total amount of the loan increasing your total debt and monthly payments.

• Also, keep in mind that if you use the loan for anything but home improvements, the IRS requires that the points paid upfront for refinancing are deducted over the life of the loan and not in the year you refinance.