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Give Yourself A Pay Raise With A Cash-Out Refinance

Brian Kline

Mortgage interest rates are at historic lows. If you’re in the market to buy a home, this is great news. A lower interest rate means a lower monthly mortgage payment, resulting in you being able to buy more house for your money.

If you already own a home, low interest rates bring more benefits for you. 

A Cash-Out Refinance

A cash-out refinance can help you in many ways. Beyond reducing your current monthly mortgage payment, a refinance could very easily put more money in your pocket every month by refinancing student loans, credit cards and any other loans.

The average student debt comes to $38,390 as of 2018 with an interest rate of about 6.8%. Repaying this debt in 10 years requires a monthly payment of $442.

Repaying that same loan with a 30-year cash out refinance at 3.6% reduces the monthly payment to $175, or $267 less per month. It’s simple to see that similar savings for a $12,000 credit card, $24,000 car payment and a $225,000 mortgage payment can put $1,200 to $1,900 more in your pocket each month.

That’s a real pay raise that you give to yourself. 

Other Benefits Of A Cash-Out Refinance

Let’s not put the cart before the horse. A cash-out refinance will cost you some money, most of which can be rolled into the new loan.

You will have to pay closing costs and you will need a new appraisal. Yet a new loan for less than 80% of your equity means you can stop paying private mortgage insurance, or PMI. 

You could also choose different terms for your new loan. For instance, you could swap out your 30-year mortgage for a 20- or 15-year mortgage.

You’ll need to run your own numbers to determine what this does to your monthly finances. Several variables go into this calculation.

For instance, if your original mortgage was for $210,000 but your equity is now $265,000 and you cash out all of your equity, you’ll be borrowing a larger amount with the new loan. You’ll have cash in your pocket, but your monthly payment will change and — even at the lower interest rate — the payment could remain the same.

On the other hand, you could take out only enough to pay off other debts and reduce the length of your loan.

Your monthly payment might not change much, but you pay the mortgage off sooner and still eliminate the other monthly payments. This can be a good long-term and short-term financial strategy.

Ultimately, your best decision to first take a close look at your personal financial situation. Carefully consider the many financial scenarios that you can accomplish with a cash-out refinance. Then determine what is in your best interest.

Historically low interest rates could be gone next month, next quarter or next year. You have no way of knowing when you’ll have this opportunity again. 

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