What’s a Cash-out Refi and Why Do It?

July 13, 2018

A cash-out refi is not for everyone. Be sure to talk with your financial planner about your individual goals and if this strategy makes sense for you.

If you’re a homeowner who’s experienced a significant increase in equity (thanks, crazy real estate market!) or has made some strides in paying off your mortgage, you might consider cash-out refinancing to help meet some of your other goals. A cash-out “refi” lets you refinance your mortgage for more than your existing mortgage, and then you get the difference in cash.

It’s a new mortgage versus taking out a second mortgage on your home or tapping a home equity line of credit. If you have a lot of equity, or even just a little (say you’re at 25 percent and you go back to 20 percent), you can put some cash in the bank.

Recently it’s been a popular option. Cash-out refinance loans have risen to 62 percent of all refinances in the first quarter of 2018, up from 54 percent in the first quarter of 2017, according to a recent study by LendingTree.

Some of my clients have cash-out refinanced to help pay for a child’s college costs, help put a fork in their credit card debt, or simply give themselves a cash cushion to help deal with unexpected expenses. Others might use it to help pay for a remodel — reinvesting that “home” mortgage money by adding to their home’s value.

It is still costing you — you’re basically taking out a larger loan, which means monthly payments will be higher, plus you are potentially adding years to paying off your mortgage — but depending on today’s interest rate environment you may be able to tackle high-interest debt more effectively. Instead of paying 20 percent credit card interest rates, you can pay off that balance on a new mortgage with a 5 or 6 percent rate instead. An even bigger win? That interest may be tax-deductible. Conventional loans (30-year fixed rate) or adjustable-rate loans (rate varies on life of loan) are options.

I don’t suggest it lightly. It’s about asking yourself what your goals are and if they are significant enough that taking cash from your home would be the wise move. What else is going on in your financial life that this is your best option? It’s important to solve ongoing spending issues being problems like rising credit card debt first — you don’t want to make the debt hole deeper and end up just racking up more credit card debt anyway. Also important is exploring whether a second mortgage or home equity line of credit might be better options — especially if you already have a favorable mortgage rate or are close to paying it off entirely.

It’s also about addressing whether that new monthly payment fits in your budget going forward. If you have been considering cash-out refinancing, taking out a HELOC or taking on a second mortgage, but aren’t sure which avenue to take or what it will do to your monthly budget, a fee-only CERTIFIED FINANCIAL PLANNER™ can help you navigate your way through it.

One size does not fit all. Your income, expenses and financial goals will vary from your friends, neighbors and colleagues’. From emergency savings to debt reduction, retirement objectives to living for today, and cash flow to insurance needs, your personal financial plan should be tailored to you and fit your needs only.

A personal financial plan can help you with making your money work harder for you. Kelly Luethje is a CERTIFIED FINANCIAL PLANNER™ professional and founder of Willow Planning Group, LLC. She provides financial education and guidance to help you live life on your terms. Kelly can usually be found on a mountain, or by a lake, working virtually with clients across the country.