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Latest posts by Larry Rothman (see all)
- Voting Particulars of Board Elections in Condo’s and Co-op’s - July 21, 2018
- You Can’t Always Rely on Square Footage Numbers - July 20, 2018
- Understanding a Co-op Ownership Structure and Proprietary Lease - July 17, 2018
New York City’s real estate prices have undergone a remarkable rebound over the last few years. While mortgage rates are up this year, you may consider refinancing in the future. Alternatively, perhaps you can obtain a lower rate since your credit score has improved. If you have equity in your home, you can take some cash out. We discuss when it is a good idea to use a cash-out refinancing.
What is a cash-out refinancing?
A cash-out refinancing occurs when you take out a larger loan than the existing mortgage balance. Banks allow this when you have enough equity in the property.
You pay off the existing loan and have extra cash, which you can generally use however you deem fit. For instance, you decide to refinance your $650,000 mortgage, and your home is worth $800,000. You have $150,000 in equity that you can borrow against if you choose.
Should you do it?
If you feel you are able to receive an attractive interest rate, there are a multitude of reasons to borrow the extra cash. You can do virtually anything with the money, although some things are more advisable than others. For instance, you could decide to use the funds for home improvements, which could be a very good reason, particularly if it adds value. You may also decide to pay credit card bills, which lowers your interest rate, but the borrowing is now secured, so you need discipline in paying it back, or else the bank could foreclose.
There are some cases where it is not a good idea to borrow the extra cash. For instance, spending the money on vacations or frivolously. In those cases, we advise against a cash-out refinancing.
You may receive a tax deduction for the interest on the extra borrowings. So, if you are paying off higher-cost credit card debt, whose interest is not tax deductible, you may receive the extra tax benefit from using a home mortgage. The new tax law changed many things, including the mortgage interest deduction, however. You can deduct interest on up to $1,000,000 mortgage rather than the new $750,000 limit as long as you took out the original loan prior to December 14, 2017. Remember, the new law placed limits on state and local (income and property) tax deductions, so many more people will not itemize, making it important to check your own situation.
You could also take out a home equity line of credit (HELOC) or home equity loan. A HELOC is a revolving credit facility, with a variable interest rate. This may work for you, if you need funds at various intervals, and plan to pay it off quickly. Your total interest payments could be lower than a cash-out refinancing, but remember, the rate fluctuates. Therefore, you need to know that your monthly interest payments could rise significantly, and the Federal Reserve has been raising short-term rates.
A home equity loan, which is borrowed in a lump-sum, is typically a fixed rate loan. The rate is probably higher than a cash-out refinancing. But, check the closing costs to see if this results in enough savings when factoring how long you plan on staying in the home.