If you’ve been following the news lately, you know mortgage rates are at historically low levels amid the coronavirus pandemic. Usually, when mortgage interest rates are low, borrowers refinance in order to lower their monthly payments. However, with mortgage refinancing with withdrawal, it’s also possible to use the equity you’ve built up in your home to cover a big expense.
You can visit an online marketplace like Credible for see current refinancing rates and withdraw money from your home to pay off high interest debt.
Benefits of mortgage refinancing with withdrawal
Like any type of financial movement, making a mortgage refinancing has its own advantages and disadvantages. To help you decide if this type of refinancing is right for you, we’ve outlined them below. Read on to find out more.
- Lower interest rates
- Pay off other debts and improve credit
- Possible tax deductions
1. Lower interest rates
The good news is that low interest rates aren’t just for new home buyers. Mortgage refinancing rates are also at historically low levels. If it’s been a while since you’ve taken out your home loan, there’s a good chance you can take advantage of record refi rates and get a much lower rate on your new mortgage.
Simply put, low rates are important when it comes to your monthly payment. In one encashment refinancing scenario, if the rate on your refinance mortgage is much lower than your original rate, you may be able to leverage the equity in your home while still making a payment similar to what you are currently paying.
You can start exploring your mortgage refinancing options by visiting Credible to compare rates and lenders.
2. Pay off other debts and improve credit
In addition to taking advantage of low mortgage refinancing rates, mortgage refinancing with withdrawal can help you pay off other debts. In this case, you borrow more money than you currently owe on the house and the difference is returned to you in cash. Once the refinance is complete, you can use the money as you see fit, including paying off existing debt.
Better yet, paying off your debts can even help improve your credit score. After all, your credit utilization rate, or the measure of how much credit you currently use versus what you have, is 30% of your credit score. When you pay off your debt, your ratio will be lower, which means your credit score should go up.
You can compare mortgage refinancing rates from several lenders immediately via an online tool like Credible without affecting your credit score.
3. Possible tax deductions
Fortunately, when you refinance by withdrawal, the IRS does not consider the money given to you as income. Instead, he views the money as an additional loan, which means you may be able to deduct your refinance withdrawal interest on your taxes.
In this case, many of the tax implications will depend on how you plan to use the money. IRS Publication 936 covers in detail the details of the residential interest tax deduction. In general, however, you can only deduct interest if you invest in an improvement that significantly increases the value of your home.
The best way to determine if you have the right loan to value ratio to qualify for cash refinancing is to visit a market like Credible. Fair enter your loan amount and see if loan refinancing makes financial sense.
Disadvantages of mortgage refinancing with withdrawal
While there are certainly many benefits of refinancing with withdrawal (like the ones listed above), there are some things you might think about as well, such as:
- Closing costs
- Potential PMI
- Take the risk of using your home as a bank
1. Closing costs
One of the main drawbacks of mortgage refinancing is that it comes with closing costs. Remember, when you refinance, you are essentially taking out a new loan to pay off your existing loan.
Just like when you took out your first mortgage, you will be responsible for covering the costs and fees necessary to close your new loan. Typically, your closing costs will be between 2% and 5% of the loan amount.
2. Potential PMI
Depending on how much you borrow, you may also need to allow for additional costs, like private mortgage insurance (PMI). Whenever you own less than 20% of the equity in the house, the lenders will ask you to carry the PMI. If you want to avoid these additional fees, be sure to ask your lender how the amount you borrow will affect your loan-to-value ratio.
3. Take the risk of using your home as a bank
Finally, once you do a cash refinance, you run the risk of seeing your home as a bank or ATM rather than your biggest asset. Typically, mortgage refinancing services recommend using only cash refinancing to cover large, one-time expenses, such as renovation costs, medical debts, or education costs.
The bottom line
If you want to take advantage of current refinancing rates while save on mortgage payments or by leveraging the equity in your home, your best bet is to talk to a mortgage lender.
With Credible you can compare several mortgage lenders immediately and see what type of refinance rate you qualify for in just a few minutes. Plus, it doesn’t affect your credit score.