Refinancing is simply the practice of replacing your current mortgage with a new one. Most people refinance their mortgage in order to get a lower rate on their interest and lower monthly payments. Cash-out refinancing is a mortgage that allows you to borrow more than you owe in order to have extra money to pay down credit card or other bills or to improve your home. Because you are transferring the debt to your home, you will have tax-deductible interest payments on the debt. In order to qualify for a cash-out refinance, you will need a good credit score and some equity in your home that equals the difference in what you owe and what you want to borrow.
The danger with a cash-out refinance is that once you get some breathing room, it can be easy to get into more debt.
Before you consider refinancing, you should take a look at a number of factors. Will you be in your current home for a few more years at least? If you plan on moving, refinancing might not make sense, since you won’t have time to recoup the closing costs that come along with the refinance.
In general, you want a reduction of your interest rate of at least 2 percent off of your current interest rate. If the difference is less than this, it might wind up costing you more than you are saving when you factor in the other fees.
When you refinance at the lower rate, how much money will you save per month? Can you then take that savings and apply it toward paying down the rest of your debt? How many years do you have left on your mortgage? You should think carefully before adding on additional years of payment. More years means more interest and more debt. Trading a 30-year or 20-year mortgage for a 15-year mortgage with a lower interest could be a win all around. You’ll pay off your mortgage sooner and have a lower monthly payment. Just make sure you calculate carefully and can afford the monthly payments. Very often they are higher, since you are paying more of the principal of your mortgage at
When you are considering refinancing, ask for a zero quote or par quote. That is the rate that you will get without the addition of points or origination fees, which could add to your closing costs. The savings you might get with points usually doesn’t justify the additional expense.
Avoid adjustable rate mortgages (ARM). If you currently have one, refinancing to a fixed-rate mortgage is probably in your best interest even if you pay more in closing costs. You’ll avoid having your payments go up, and risking your home.