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Cash-out refinancing?

John wants to borrow $30,000 from the equity he has in his home to make home improvements. Mortgage rates have dropped 4% since John took out his mortgage and he has $100,000 left on his mortgage. Should John get a home equity loan or should he refinance his first mortgage and use a 'cash-out' option to get the money he needs for his home improvements.

Analysis: Even if John did not want any money for home improvements, he should most likely refinance his first mortgage. As a rule of thumb, if mortgage rates have dropped two 2% or more since you have taken out your mortgage, it most often makes sense to refinance your mortgage. Factors that may not allow refinancing to be a viable option include: 1) a pre-payment penalty on your mortgage, 2) a small amount left on your mortgage which may not result in enough benefit to offset refinancing costs.

Since rates have come down sharply since John took out his first mortgage and he still has a sizable mortgage to pay off, John should refinance his mortgage. If he also wants to borrow from the equity he has in his home, cash-out refinancing is a sensible option.

If John was to 'cash-out refinance', John would take out a new mortgage for $130,000. He would pay off his current mortgage of $100,000 and the $30,000 that he has left over would be the equivalent of a home equity loan. John would therefore lower his mortgage rate and the $30,000 he has borrowed from his home's equity would also likely be at lower rate than if he were to take out a separate home equity loan.

More Related Information On...
cash-out refinancing - see Cash-out refinancing, Types of home equity loans
choosing a type of home equity loan - see Which home equity loan type is right for me?, Types of home equity loans

More Case Studies:

  • Using home equity for debt consolidation: Tony wants to use the equity he has in his home for debt consolidation but he is unclear about the advantages and disadvantages of doing this. If borrowing from his equity is suitable for his situation, what type of loan should he get?
  • Using a home equity loan for home improvements: Charlene and Russell are considering borrowing from their home equity to make home improvements. They have a rough estimate of costs and they plan on doing the work over the next year. What type of loan is right for them?
  • Should you use the equity in your home to buy a car? Christine wants a new car but she has no savings. Should she use a home equity loan to buy a new car?
  • Ramifications of accepting a loan offer. Milton is thinking of accepting a home equity loan loan offer. How will this affect future selling, future home equity borrowing and what will be the tax implications?

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