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FAQs About Trading in Your Home's Equity for Cash
(page 3 of 4)
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,
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