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When Cash-Out Refinancing Makes Sense

But if there is no substantial rate reduction, it would not pay to refinance just to get at cash locked up in the home. You wouldn't want to pay $10,000 to get a new mortgage just to buy a car with a low-rate loan. Even if you were to pay off a 20% credit-card balance with a new, 4.4% mortgage, once refinancing fees were considered, the savings might evaporate.

Third, consider the alternatives. You might pay only a few hundred dollars in application and appraisal fees for a fixed-rate home equity installment loan or floating-rate home equity line of credit. Five-year installment loans are charging about 7%, and many HELOCs charge 5% to 6% after the initial, lower rate expires.

Because a home equity loan is separate from the mortgage, the payments would end as soon as you pay off the balance. In a cash-out refinancing, you'd have to pay for that extra cash for the life of the mortgage.

Another alternative is to tighten your budget to save for the purchase you'd make with the cash-out refinancing, or to pay off your credit card debts faster. Use the BankingMyWay Credit Card Payoff Calculator to devise a plan.

Finally, if you do opt for a cash-out refinancing, consider making extra principal payments whenever possible to trim the debt ahead of schedule. With a fixed-rate loan, this will not reduce the required payments, but it will allow you to pay the mortgage off early, saving a bundle in interest charges over the years.

In effect, those extra payments earn a return equal to the mortgage rate, which is probably better than you can earn in bank savings.

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