A cash-out refinance is an excellent way to pay for home improvements. Other uses may put your home at risk.

What is a cash-out refinance? 

A cash-out refinance offers you the option of being able to both refinance your mortgage and borrow money at the same time. You receive a check at closing when you refinance your mortgage. The balance owed on your new mortgage will be higher than your old one by the amount of that check, plus any closing costs rolled into the loan. It’s sort of like “backing up” your mortgage by taking out some of the money you’ve paid into it and increasing the mortgage principal owed as a result.

The balance or difference created goes to you in cash, and you can spend it on home improvements, debt consolidation, or other financial needs. However, remember, you must have equity built up in your house to use a cash-out refinance.

Cash-out refinance and home equity?

To qualify for a cash-out refinance, you need to have a certain amount of home equity. That’s what you’re borrowing against.

Pros of cash-out refinance

PROS  
Debt consolidation Mortgage debt can also be repaid over a considerably more extended period than other types of debt, up to 30 years, so it can make your payments more manageable if you have a large amount of debt that must be repaid in 5-10 years.
Lower interest rates This is the most common reason why most people do a traditional refinance, and it makes sense for cash-out refinancing, too, because you’ll be taking on a larger loan and lowering your interest costs. If you use the cash to pay off other debts such as credit cards or a home equity loan, you’ll be reducing the interest rate you pay on that debt.
Tax Deductions The mortgage interest deduction may be available on a cash-out refinance if the money is used to buy, build, or substantially improve your home.
Value-Added Home Improvements Homeowners who use cash-out refinances for these types of projects can deduct the mortgage interest from their taxes if these projects substantially increase the home’s value.
Pay Your Child’s College Tuition If your adult child needs help paying for college, using your home’s equity to make up the shortfall can be a prudent move if student loan rates are much higher than what you can get with a cash-out refinance.

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