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FAQs About Trading in Your Home's Equity for Cash


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4. How Do I Know When It's Time to Refinance? With the New Lower Interest Rates, Is It Worth Refinancing? When looking to refinance be sure to see if you will be able to lower your monthly payments by enough to also pay off the closing costs on the loan before you sell the house. Remember, there is no such thing as no-cost refinancing, no matter what anyone tells you. You will either be paying a higher interest rate than you would otherwise or you will be borrowing the closing costs. Never let lower payments be the mitigating factor for your choice, discuss and understand how the lender is including the costs for closing the loan, then decide.

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5. I Have the Need to Consolidate My Other Debts and I Have Heard That I Can Secure a Mortgage for up to 120 Percent of My Property's Value. What Do I Need to Know About This Process and Are There Any Pitfalls to Look Out For? This is usually not an advisable strategy. By refinancing for more than the property's value you will have a hard time selling the property, when the time to do so arrives, because you will undoubtedly be short funds and also be responsible to pay agent fees at the same time. If you think the value of your property is going to increase dramatically, to off set this deficit, you need to really consider many more factors, all of which are not absolute or reliable. Chances are you will end up behind the mortgage 8-ball and suffer for it. Be careful!

The government will also disallow some of your tax benefits with this type of scheme. If the funds you receive from refinancing do not contribute to improvements on the property, or the acquisition of a new one, you do not receive the full tax benefit normally associated with this type of loan. Further, your total home equity debt is limited to the smaller of: $100,000 or the fair market value of your home, less the amount owed on your original mortgage. Interest on amounts over the home equity debt limit gis enerally treated as personal interest and is not deductible.

6. I'd Like to Refinance My Home and Take Cash Out to Pay Off Loans, and Credit Card Bills and End Up With Additional Cash to Invest in Property. My Spouse Just Wants to Leave Things Alone and Just Keep Paying Our Bills in the Traditional Manner. Which Choice Would You Opt For? Mortgage loans on a primary residence are the least expensive form of borrowing for most consumers. That's especially true if you can use the mortgage interest deduction on your state and federal income taxes. Assuming you can use the mortgage interest deduction, the effective rate on the new mortgage should be less than even your auto loan. You can estimate your effective after-tax rate on your mortgage by multiplying the interest rate by one minus your tax rates.

Also keep in mind that any time your LTV, loan to value ratio, is above 80% you will be required to get PMI, private mortgage insurance. That means you will be restricted to what you may use your mortgage money for. The IRS also requires that the home equity portion of your mortgage be less than $100,000 to allow for the Home Mortgage Deduction, HMD.

By trying to eliminate your other debts, car loans, credit cards, etc you do pay them off but you also start paying out on them through your new mortgage, and that can take up to thirty years. Does the immediate debt relief warrant this strategy? You can, however, help this situation by making extra payments against the principal. Consider if you can do this each and every year, and maybe you will be able to shorten the overall term of the loan by five or six years. If you are considering taking cash out to invest in property, you're taking on the high risk that the appreciation in property values won't outpace your interest expense. Mortgages run for very long periods, and it is virtually impossible to foresee all future events, so always be prepared for the worst and be conservative in your conclusions.
 
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