Refinancing: When you refinance your home, you get a new loan to replace the one you already have. There are a lot of reasons for choosing a new loan plan. You might want to: Get a lower interest rate, combine or pay off bills, get money for home improvements or repairs, etc.
Refinancing to get a lower interest rate will probably save you money if:
- The new interest rate is 2% or more below the rate you pay now; and
- You plan to stay in your home for three or more years. Cashing out from refinancing involves refinancing your current loan arrangement into one that costs more in the long term, but gives you the money you need now. Generally, the money that you get out goes directly into your loan balance. It’s like using your existing equity in your home loan to forge a new loan.
Of course, cashing out isn’t always the right call. For every dollar that you extract with your equity, you will have to pay that dollar back with interest later. The net amount of money that you have to pay will go up. Refinancing can be a wise decision if the money will do you more good now than later. If you view refinancing not as a cash grab, but as a way of deliberately using your resources to invest, then cashing out is much more plausible.