If you’re a homeowner with considerable equity in your home, you might want to consider a cash-out refinancing plan to finance home projects or eliminate high interest debt. In a nutshell, this arrangement allows you to initiate a new mortgage with a larger principle than your existing one – then, you obtain cash on the balance between the two amounts. Used responsibly, there are several advantages to a cash-out mortgage, including these top six benefits.
- You may be able to obtain a better interest rate. As compared to other types of property-based loans, a cash-out refinancing usually offers lower interest rates. Home equity, home improvement and business startup loans are typically a few fractions of a percentage higher. A lower interest rate means reduced monthly mortgage payments.
- You can improve your on-hand cash flow. You can apply funds from cash-out refinancing to balances due on high-interest debts or credit cards accounts. Eliminating these debts puts you in a better cash liquidity position for unexpected costs or emergencies. You’ll still carry the debt through the refinancing, but you’ll only be making one payment per month on a loan carrying a much lower interest rate.
- You’ll get the opportunity to improve your credit score. When you pay off or pay down balances on revolving debt or credit cards, you improve your credit rating. Credit cards that you’ve maxed out have a severe negative impact on your score, as are those where you’re only paying against interest instead of the balance.
- There are tax advantages of cash-out refinancing. You’ll take advantage of a couple of tax benefits with a cash-out refinancing. First, the interest you pay is tax deductible; the interest you pay on other types of debt or credit cards is not. Second, some of the closing costs you’ll incur through the refinancing process are also not subject to tax liability.
- Fees for refinancing can be minimal under certain circumstances. There are costs related to refinancing your mortgage, including application fees, getting your credit rating, document review expenses, and title insurance and search. However, if you have high equity in your home and a great credit rating, these costs may be reduced. In addition, if you stick with the same lender that issued your original mortgage, some of these fees may not be necessary the second time around.
- Cash-out refinancing can help you boost your home’s fair market value. Many homeowners use the proceeds from their cash-out refinancing to fund home improvement projects. These renovations almost always cause the fair market value of the property to increase, whether the projects are interior, exterior or add-ons to the existing square footage.
While homeowners must use caution when arranging a cash-out refinancing plan, the advantages can be significant under appropriate circumstances. If you’d like to know more about whether a cash-out refinance is right for you and qualification requirements, consult with a refinancing professional for details.
*Disclaimer: Paramount Equity Mortgage is not a tax advising company. If you have any questions, please reach out to your CPA for tax advice or other tax related questions.