Credit cards and medical bills are the number one cause of bankruptcy in America. Credit card companies draw you in with introductory rates and increase the Interest rate over time. Soon you realize the monthly payment is primarily going towards interest. If this sounds familiar, you have options. A debt consolidation refinance is available to payoff high interest credit cards by using the equity in your home.
In some cases a debt consolidation refinance may not be the best option. Determining how much the closing costs are vs the amount of interest savings available is a valuable method to help make a good financial decision.
One method mortgage professionals use is the time savings method. First determine how much you will save every month by refinancing your home. The determine the amount of total closing costs associated with the home loan. By dividing the monthly savings in to the total closing costs, you can determine how many months it will take to recoup the mortgage closing costs .
If you plan to sell your home within five years, a refinance may not be the best option for you. The equity (the value of your home minus the amount owed) may provide enough money to pay off all of your debt once your home is sold. If this is the case, it is not worth paying the closing costs to close a debt consolidation refinance.
You can also refinance to take cash out for the purposes of rennovating your home. I highly recommend completing two appraisals during the mortgage process if you wish to complete a cash out refinance for home improvements.
First you will need to complete the standard mortgage appraisal to determine if you have enough equity in the home to complete the transaction. In some cases, there is not enough equity to access the cash needed for home improvements. The second appraisal (which is not required but reccomended) would determine the value of the home after the home improvements are completed. This type of an appraisal is called, an “as completed appraisal”.
Once the future value is determined you can make a sound financial judgement on whether or not the home improvements are both completing. It would not be wise to spend $50,000 for rennovating if it will only increase the value of the home by $20,000.
Of course, the decision to improve your home may be for comfort only. We understand this and do not require the second appraisal if you are uninterested in increasing your homes value. The final decision is yours to make. Sometimes that extra bedroom is worth far more to you than the market value of the home.
Another use for a cash out refinance may be for investment Capital. You may need money for a business venture, want to purchase stock, or simply want the money available for an emergency or college fund. Using equity to invest carries a great level of risk and 100% of all investments carry a risk of loss. Most mortgage professionals are not licensed financial planners and cannot offer advice on this topic. However, if your financial planner or business advisor feels you will receive a 10% rate of return on your investment, you can easily determine of the refinance is worth your money. Subtract the APR for the mortgage from the estimated rate of return. Any positive number would be your positive return on investment.
I highly recommend you do not use a stable asset like real estate to invest in a volatile investment like stock but understand in a free market, you have the right to spend your money as you see fit.
Should You Do a Cash Out Refinance?
The best course of action is to speak with a professional. You may want to consult an accountant, a mortgage professional, and a financial planner to learn asuch as you can about the proces. After weighing the positives and the negatives it will be you that decides. To schedule a free consultation, click here, or give is a call at (518) 324-5544
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