Terms to Know:
- A cash-out refinance is a new mortgage (replacing your old one) that lets you borrow extra money as part of the mortgage.
- A fixed home equity loan is a loan with a fixed interest rate and payments that use your home as collateral.
- A home equity line of credit (HELOC) is a loan that uses your home as collateral and can be used like a credit card, in that you only take out the amount you need when you need it.
Looking to pay off high-interest credit card debt, contribute to your child’s education or take on a pricey home improvement project? A cash-out refinance on your home can help pay the way. By refinancing for more than you currently owe, you get access to money that’s otherwise locked up in your home. It’s a great way to use your home’s equity, but be sure you know the facts before signing on the dotted line.
- Your refinanced mortgage replaces your old mortgage. Your current loan balance and amount of cash you take out will make up your new loan principal. This gives you the opportunity to review and choose new options for your mortgage. However, it also means that your payments will “reset” to being almost entirely interest at the beginning. If your mortgage is young and still mostly interest, this may be an issue.
- You’ll probably have to pay more, and for longer. By taking cash out, you’re borrowing more money. You’ll likely pay more per month and/or extend your mortgage to pay it all off. Also note that the shorter the term of the equity loan you take out, the less expensive it may be in the end.
- You may be able to lower your interest rate. If rates or your credit score have improved since you last took out a mortgage, you could score a lower interest rate. These rates may even be lower than home equity loans or credit lines. Be sure to compare interest rates before making a decision on the right option for you.
- Your interest on money you cash out may be tax-deductible. As with your initial mortgage, the IRS states that all interest paid for mortgages up to $1 million or less may be tax-deductible if you itemize deductions on your tax return.1 Borrowing money through a credit card or most other means won’t provide you with this tax benefit. To be sure, you may want to consult with your tax advisor for deductibility in your situation.
- You’ll need to pay closing costs. As with your first home loan, refinancing comes with closing costs in the range of hundreds to thousands of dollars. Compare this to HELOCs and home equity loans, which have most closing costs covered at Navy Federal.
It’s helpful to have the lump sum available from your refinanced mortgage because college expenses can mount, as can the costs of many home remodeling projects. A cash-out refinance can alleviate some of the pressure associated with these endeavors, as your home’s equity will be more liquid (available to you as cash) and likely available at a lower rate than alternative loans. You may even improve your debt profile in the process. Another thing to take into consideration is if you’re approved for a refinance rather than a home equity loan or HELOC, these products may have different credit requirements. Talk with your lender about your options.
Before making any decisions, explore your refinancing and home equity options with Navy Federal to get the loan that makes the most sense for your situation—view our current rates for refinance mortgage loans.