Cash-Out Refinance: Avoid the $250,000 Blunder Most People Make
Categories: Debt Management, Financial Terms, Mortgage, Refinance
Are you thinking about a cash-out refinance? While it might seem like a great idea to free up some cash each month, it creates further financial strain in the future. Therefore, before you jump in, let’s look at the numbers in order to see how this decision could cost you a whopping $250,000 over time. Let’s begin by looking at the average debt provided by Dave Ramsey.
What is a Cash-Out Refinance?
To clarify, a cash-out refinance allows you to take out a new mortgage for more than you currently owe, as well as pocket the difference. It’s tempting if you’re looking for some extra cash or want to consolidate debt. However, in today’s market, with interest rates climbing, you might be setting yourself up for a costly surprise.
Cash-Out Refinance |
||||
| New Loan | Interest Rate | Monthly Payment | New Total (Current Payment $2,669 – Cash-Out Refinance $1,962) | |
| New Mortgage Balance | $295,000 | 7% | $1,962 | $707 (Monthly Relief) |
Cost of Cash-Out Refinance |
||||
| Monthly Payment | Remaining Number of Payments | Cost Over Loan Life | Additional Money Out of Your Pocket!
(Refinance Cost $706,550 – Total Cost Previously $454,591 |
|
| $1,962 | 360 | $706,550 | $251,959 | |
What is a Home Equity Loan?
A Home Equity Loan, on the other hand, is a type of loan where you borrow against the equity you’ve built up in your home. To put it another way, it’s a second mortgage with a fixed interest rate, a set repayment term, as well as consistent monthly payments. Unlike a HELOC, which acts like a credit line, a Home Equity Loan gives you a lump sum upfront that you repay over time. Therefore, it is a stable option for consolidating debt or financing big expenses.
Home Equity Loan |
||||
| New Loan | Interest Rate | Home Equity Loan Payment + Mortgage | New Total (Current Payments $2,669 – Mortgage with HEL $1,959)
(Credit cards and auto loan paid off) |
|
| Home Equity Loan | $57,500 | 9% | $793 + $1,166 = $1,959 | $710 (Monthly Relief) |
Cost of Home Equity Loan |
||||
| Monthly Payment | Remaining Number of Payments | Cost Over Loan Life + Mortgage | Additional Money Out of Your Pocket!
(Home Equity Loan Cost $461,249 – Total Cost Previously $454,591 |
|
| $793 | 105 | $83,287 + $377,962 =
$461,249 |
$6,658 | |
Monthly Payment Relief: What Does It Really Cost?
Sure, both options give you that monthly payment relief you’re looking for, however, only one of them doesn’t mortgage your future. Therefore, by choosing the home equity loan over the cash-out refinance, you will not only save big now, but in the long run as well.
| Out of Pocket | Difference Between the Two Options | |
| Cash Out Refinance | $706,550 | $245,301 |
| Home Equity Loan | $461,249 |
Bonus: Short-Term Impact
Some people say they won’t keep their mortgage for 30 years. However, the financial impact of a cash-out refinance can be seen after just one year!
BONUS: Cash Out Refinance: Cost By Year |
|
| Year | Cost |
| First Year | $12,975 |
| Third Year | $26,987 |
| Fifth Year | $42,894 |
| Tenth Year | $80,679 + $11,898 = $92,577 |
Your Best Option in Today’s Market
In today’s market, a home equity loan is often the better choice. It not only provides the monthly relief you need, but it also doesn’t cost you a fortune in the long run. Remember, it’s not just about getting by today, it’s about protecting your future, too.
Leave a Reply
Want to join the discussion?Feel free to contribute!