Cashing-Out: Where does the money go?
A cash-out refinance means a homeowner refinances a mortgage at a higher loan amount than the current loan balance in order to transform a portion of the equity into cash. The record low interests rates of recent years created a flurry of refinances as many homeowners refinanced to reduce their interest rate.
Recent reports, however, are showing a different trend. Cash-out refinances are increasing and homeowners are pocketing the increased equity properties are building as a result of the hot real estate market driving values up. So, where is the money going?
Many owners are re-investing in their properties, making improvements and adding up-grades. Just as often, homeowners are taking the extra equity and paying off other, higher interest rate debt, such as credit cards and auto loans.
Caution is advised to homeowners considering a cash-out refinance, however, as inflated values now could mean they end up with a bigger mortgage and no equity if market prices suddenly drop. If you are considering a cash-out refinance, you should carefully weigh your answers to the following questions:
1. What am I going to do with the cash? Will it improve my financial picture or weaken it? Will I still have equity in my property?
2. If debt consolidation is the purpose, am I truly saving money over the long-term or am I simply moving the debt around?
3. If the real estate market experiences an adjustment, will I have enough equity after the refinance to sell my home at a profit?
4. Is the appraised value being used for the refinance realistic if real estate sales slow down significantly?
5. If the purpose is to reduce or eliminate credit card debt, will I change my credit habits or am I likely to build up significant credit card debt again?
Only you can decide if a cash-out refinance is a good financial move or not. If you are unsure, talk to your financial advisor and discuss your options before you refinance.