|
When a Cash-out Refinance is the Right Choice
Author David Schneider | Dec 03,2007
|
In the past few years, we have seen interest rates rise and fall like a rollercoaster ride. When interest rates were low, there was a rush of refinances and home purchases. When interest rates rose, the real estate boom pulled back. And now that you need to access the equity that you have built up in your home, you are trying to decide which route to take -- a home equity line of credit or a cash-out refinance. How do you know which way to go?
When a Cash-Out Refinance is the Right Choice: Interest Rate Analysis
If you do not know it already, the first thing that you need to do is to find out what interest rate you are currently paying on your mortgage. Then, you need to find out what the going rate is on a mortgage today. Write this information down so that you can access it in a moment. Now, find out what the interest rate is for an equity line of credit. Go online and find a blended rate mortgage calculator. Plug in the information that it requests and see what the blended interest rate that you will be paying is if you keep your current mortgage and take out an equity line of credit on your home. Write this number down, circle it and set it aside for now.
Find a mortgage payment calculator and plug in the requested information. When it asks for the mortgage amount, include the sum of the current balance of your existing mortgage and the equity amount that you need. The payment calculated in this scenario will be the payment that is required if you do a cash-out refinance. Write this number down and circle it. Is this payment higher or lower than the blended rate payment that you calculated earlier?
When a Cash-Out Refinance is the Right Choice: Cost
Even if the cash-out refinance mortgage payment is lower, that doesn’t necessarily mean that a cash-out refinance is better. There are other costs that need to be considered when choosing between an equity line of credit and a cash-out refinance. An equity line of credit usually does not require that closing costs are paid, while a cash-out refinance usually has closing costs associated with establishing it.
So, after you have calculated the payments for each scenario, you will need to get an estimate of closing costs that you will have to pay for a cash-out refinance. Again, there are closing cost calculators online that can help you come up with this figure. And with this information you have one more step to go.
When a Cash-Out Refinance is the Right Choice: Break-Even Analysis
With all of the numbers that you have calculated and circled, you will now need to do calculate a break-even analysis. A break-even analysis takes the difference in your monthly payments between the equity line option and the cash-out refinance option, and considers the costs that you will have to pay in order to refinance the mortgage. By dividing the total closing costs by the difference in the two mortgage amounts, you will get the number of months that it will take you to recoup your costs. Provided that you will own the home for the number of months or more than it takes for you to break even, then it is worth it to do a cash-out refinance instead of an equity line.
In the past few years, we have seen interest rates rise and fall like a rollercoaster ride. When interest rates were low, there was a rush of refinances and home purchases. When interest rates rose, the real estate boom pulled back. And now that you need to access the equity that you have built up in your home, you are trying to decide which route to take -- a home equity line of credit or a cash-out refinance. How do you know which way to go?
When a Cash-Out Refinance is the Right Choice: Interest Rate Analysis
If you do not know it already, the first thing that you need to do is to find out what interest rate you are currently paying on your mortgage. Then, you need to find out what the going rate is on a mortgage today. Write this information down so that you can access it in a moment. Now, find out what the interest rate is for an equity line of credit. Go online and find a blended rate mortgage calculator. Plug in the information that it requests and see what the blended interest rate that you will be paying is if you keep your current mortgage and take out an equity line of credit on your home. Write this number down, circle it and set it aside for now.
Find a mortgage payment calculator and plug in the requested information. When it asks for the mortgage amount, include the sum of the current balance of your existing mortgage and the equity amount that you need. The payment calculated in this scenario will be the payment that is required if you do a cash-out refinance. Write this number down and circle it. Is this payment higher or lower than the blended rate payment that you calculated earlier?
When a Cash-Out Refinance is the Right Choice: Cost
Even if the cash-out refinance mortgage payment is lower, that doesn’t necessarily mean that a cash-out refinance is better. There are other costs that need to be considered when choosing between an equity line of credit and a cash-out refinance. An equity line of credit usually does not require that closing costs are paid, while a cash-out refinance usually has closing costs associated with establishing it.
So, after you have calculated the payments for each scenario, you will need to get an estimate of closing costs that you will have to pay for a cash-out refinance. Again, there are closing cost calculators online that can help you come up with this figure. And with this information you have one more step to go.
When a Cash-Out Refinance is the Right Choice: Break-Even Analysis
With all of the numbers that you have calculated and circled, you will now need to do calculate a break-even analysis. A break-even analysis takes the difference in your monthly payments between the equity line option and the cash-out refinance option, and considers the costs that you will have to pay in order to refinance the mortgage. By dividing the total closing costs by the difference in the two mortgage amounts, you will get the number of months that it will take you to recoup your costs. Provided that you will own the home for the number of months or more than it takes for you to break even, then it is worth it to do a cash-out refinance instead of an equity line. |
|
|
Print
E-mail
Del.icio.us
Digg
