Refinancing in Changing Real Estate Markets

By Karen Lawson
Local Lender Columnist
Apr 2, 2007
You've got credit card debt, medical bills, and car payments. A cash-out refinance may provide cash to pay off high interest debt and other bills, but you need to look at the big picture--your overall financial situation, your mortgage balance and the amount of home equity you have, and current real estate market trends in your area. Additionally, knowing how long you plan to keep your home can impact what type of refinancing will best meet your needs.

Home Equity: the Key to Improving Your Finances

If you've owned your home for some time you may have enough equity to refinance your mortgage and get some additional cash. Home equity is typically defined as the difference between the present value of your home and the amount of mortgages owed on it. Although some lenders offer refinancing to 100% of your home equity, this leaves you no equity cushion in the event that you have to sell you home. For instance, Florida real estate markets are fluctuating, and 100% refinancing could potentially lead to serious problems if property values decrease.

Which Bills Should I Pay through Refinancing?

Let's say that you are carrying credit card debt of $20,000 at an average interest rate of 10%. If you refinance your mortgage to a fixed rate at 6.25%, you'll reduce your interest rate by approximately 3.75% and possibly gain income tax advantages associated with deducting mortgage interest. Before shopping for cash-out refinancing, you should have a clear idea of how much you owe on consumer debt, the interest rates you're paying, and the amount of home equity you're comfortable using to pay off debt.

About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds a Master's degree in English from the University of Nevada, Reno.