Paying off auto loans may not be advantageous, either. With a 30–year cash–out refi, you would still be making monthly mortgage payments in three decades, which means you’d still be paying off that car loan when the car itself is a distant memory.
If you’re not sure whether a cash–out refinance makes sense for you, speak with a mortgage lender, broker, or financial advisor who can take a closer look at your finances and advise you on your options.
Borrowers may qualify for mortgage interest tax deductions, provided that funds from the cash–out refinance are being used for property improvements. Some examples of home improvements that are eligible for mortgage interest tax deductions could be:
- New additions to a home
- Home security installation
- HVAC replacement
- Roofing repairs
- Decking and fencing installation
Disclaimer: TheMortgageReports does not offer tax advice on this site. Please consult with a tax advisor about your situation before making any decisions about how a cash–out refinance affects your taxes.
Cash–out refinance FAQ
Yes, a cash–out refi is a good idea when you meet a few basic criteria. You need to have sufficient equity, qualify for a lower interest rate, plan to live in your home for at least three to five years, and a plan to use the cash for worthwhile purposes – such as consolidating high–interest debt or funding a project that will increase the value of your home.
A cash–out refinance can be a bad idea if you use the cash as a way to consolidate debt and then run up the debt again. “I advise my clients to pursue a HELOC instead of a cash–out refi if they are looking to have an open line of credit available for emergencies, home improvements, or short–term purchases that they will pay off within a short amount of time,” says Upshaw.
In a normal market, it typically takes 30 days to close after applying for a cash–out refinance loan. “But due to current rates being so low and the increase in refinance volume, it’s currently often taking between 45 to 60 days to get the money from a cash–out transaction,” cautions Leahy.
So long as you have a decent credit score (above 620), good credit history, stable job security and earnings potential, and sufficient equity built up in your home, you should be able to meet most cash–out refinance requirements
You generally need more than 20% equity already built up in your home before meeting most cash–out refinance requirements. But you may be able to get a VA cash–out refinance with less.
Yes, if your accrued debt (such as outstanding credit card debt) charges much higher interest rates than cash–out refinance rates, then getting a refi could be beneficial.
If your current mortgage boasts a low interest rate that you’re happy with, and if you only need a relatively small amount of cash, a home equity loan may be a better option than a cash–out refinance. “Home equity loans usually come with lower closing costs and incentives from lenders, as well,” says Trott.
The minimum credit score you need for a cash–out refinance is typically 620. However, FHA and VA cash–out refinance loans might allow a slightly lower credit score. Lenders set their 24 hour payday loans Clinton TN own minimums, so credit requirements can vary depending on where you apply.
Aside from a small ding for having your credit pulled, a cash–out refinance does not affect your credit score. “On the other hand, if the cash–out from the loan is used to pay off debt, you may notice an improvement in your credit score,” Leahy says.