The article concerns the following question – Cash-Out Refinancing: When does it make sense? Cash-out refinancing is very tempting for many people. But the point most people forget is that the equity in one’s home is not an ATM. This is not a savings account. This is the purchase of your biggest asset, the place where you live, the place you raise your children and grandchildren, and the place you create your memories. It is a treasured asset in the lives of North Americans and sadly, too many have lost their homes due to irresponsible cash-out refinancing.
In very broad terms, cash-out refinancing does not make sense in the majority of instances. Because many people do not create new habits, and actually fall back into their old ways of living, most cash-out refinancing efforts fail. Truly, the proposed budget and the lowered payments sound like a good idea at the beginning, but advance-forward a few years and most people have nothing to show for their troubles. They have less equity in their homes, and their financial picture is not any brighter.
Indeed, the only real time when cash-out refinancing makes sense is when people stick to their plans. If you use the cash-out to consolidate debt, then pay off your credit cards and hide them in the safe deposit box so that you cannot use them so readily. Resist the urge. For many people the euphoria of being debt-free except for a mortgage is short-lived. Old habits die hard and momentary lapses lead straight back to the original problem. Thus, you must absolutely decide to follow through with your goals in order for cash-out refinancing to make sense.
Additionally, cash-out refinancing can work, and does make sense if you manage it properly. For example, you decide to buy an existing business and your use your equity to finance the venture. Realistically speaking and from an accounting standpoint, the business owes that debt, not your personally. So you need to ensure that the business is paying that debt down each and every month.
And the business budget needs to have a realistic period in which to pay that debt. If the bank had granted a business loan and expected it to be paid in five years, then you need to use the same time frame for the business to honor its commitment. If the business cannot fulfill its obligation, then your refinance was a waste. In order to access cash-out refinancing for your business venture, and for it to make sense, the business needs to pay off the loan in the required amount of time. Of course the loan is only that portion of the mortgage that was actually obtained for the business, not the total mortgage amount.
Another circumstance when cash-out refinancing does make sense is for tax purposes. While we recommend you speak to your own accountant or government tax agency, there are advantages to making payments on your mortgage as opposed to credit card debt or other loans. As well as swapping out high interest for a lower rate, you might also be entitled to certain tax benefits.
Unquestionably, each situation is unique, and in order to determine whether cash-out refinancing makes sense for you is to review your options by calculating the actual numbers and by understanding your personality and goals.