The following post is from Melissa Batai
Do you have your heart set on some home improvements? Maybe your bathroom looks like it came straight from the 1980s. Maybe you’d like to upgrade your kitchen, put in a nicer countertop and replace the cabinets and flooring.
Of course, the longer you stay in your house, the more important it is to maintain and upgrade the property, but how should you pay for those updates and renovations? A popular option is a cash-out refinance, but there are several reasons that might not be the smartest choice.
The Interest Rate May Be Higher than What You Were Paying
A cash-out refinance typically has a higher interest rate than a standard refinance. Remember, you’ll be paying that higher interest rate for the life of the loan and on the entire balance of your home loan. That can add a significant amount of interest that you pay over the course of a 30-year mortgage.
Pay More in Closing Costs & Fees
In addition to paying a higher interest rate over the life of the loan, you’ll also have to pay closing costs and fees when you refinance. These average approximately $2,200, which is a lot just for the privilege of pulling the equity out of your home.
Have to Pay the Mortgage Longer
The biggest reason not to get a cash-out refinance is that you’ll be paying your mortgage longer if you take a 30-year mortgage and paying all the additional interest that goes with it.
For instance, our family friend, Joyce, bought her house in the mid ‘80s for $40,000. In the mid ‘90s, when she was 10 years into her original 30-year mortgage, she took a cash-out refinance to redo her kitchen and expand her narrow living room. When she refinanced, she took out another 30-year mortgage. Around 2001, she refinanced again to add a garage onto her house. She was about 15 years into her second mortgage and took out a 30-year mortgage for a 3rd time. She finally paid off her mortgage in 2019 when she was 70. She had a mortgage consistently for 34 years, and each time the mortgage was for a higher amount than the original mortgage as her property increased in value.
Your Equity Is Tied Up In Your House
You may think a cash-out refinance is wise because you’re increasing the value of your home. That is true. However, that only really matters if you plan to sell your home. If you plan to stay put in your home, you can’t tap that additional home value.
Sure, our friend Joyce added value to her home, but she doesn’t plan to sell. She plans to keep the home until she dies. Meanwhile, by being on a continual cash-out refinance cycle, she missed the opportunity to invest in the stock market and increase her retirement account.
If you’re considering a cash-out refinance to upgrade your home, reconsider. Better options may be to save cash for the refinance or to take out a loan specifically for home improvements and leave the equity in your house, as well as your mortgage, alone.
My Question for You
Do you think cash-out refinances are a smart way to get money for a home remodel? If not, what would you suggest people do instead?