Cash out mortgage question

[2TxAgs]

When someone takes cash-out in a refinance, are there rules as to what that money can be used for? Must it be used for a home upgrade, or can it be used to pay college bills, take a vacation, or whatever?

(Specifically, can I take cash out on a refi to pay for college (at a great rate!) rather than taking out Stafford loans at 6 or 7%?)

Thanks!

 

[Tinkerdreams]

I don't see why not. I took out HELOC to pay for my son's college and at 3% it's a heck of a lot better than the student loan rates!!

I think as long as you have enough equity, you should be OK.

 

[kathie859]

In a cash out refi, you may use the money any way you choose. There's no restructions at all.

 

[Darcy03231]

Just keep in mind that by doing this you are trading secured debt (mortgage) for unsecured debt (student loan). If something happens down the road and you can't make your mortgage payment, your house can be foreclosed on. I only mention this because I know someone that this happened to. Everything was fine until her husband became disabled. With his SSDI and her income they could no longer make the new mortgage payment (where they could have easily made the old one). They ended up losing their house to foreclosure and property values tanked in the meantime as well.

 

[2TxAgs]

Darcy - I appreciate the warning, it is something I've thought about.

What would be the difference in taking out a HELOC and a cash-out refi? Don't both put the home at risk if you can't repay?

 

[punkin]

I am not sure, how "unsecured" student loan debt actually is. It is not dischargeable in bankruptcy and will follow you forever.

I think you need to consider all the angles here, but there is no actual restriction.

 

[DisneyEater]

Darcy - I appreciate the warning, it is something I've thought about.

What would be the difference in taking out a HELOC and a cash-out refi? Don't both put the home at risk if you can't repay?

In simple terms, a HELOC is a line of credit like a credit card tied to your house in that you can charge up and pay down and the line remains open for continuous use until you hit the limit or a bank decides to freeze the line.

A cash-out refi is a 1 time event where you refinance your loan to a higher amount using the equity you build in your home and recieve a lump sum of cash vs. the line of credit in the previous example.

 

[2disneyboys]

Op, to answer your question, yes, you can use the cash out money or anything. However, I agree with previous posters, it would put your house at risk and I would consider other options first.

 

[emmababy]

You have to have a lot of equity to do that now!

 

[Eeyore98]

Just keep in mind that by doing this you are trading secured debt (mortgage) for unsecured debt (student loan). If something happens down the road and you can't make your mortgage payment, your house can be foreclosed on. I only mention this because I know someone that this happened to. Everything was fine until her husband became disabled. With his SSDI and her income they could no longer make the new mortgage payment (where they could have easily made the old one). They ended up losing their house to foreclosure and property values tanked in the meantime as well.

On the flip side of that, if something that bad happens down the road, many states will let you keep your primary residence in a bankruptcy...but federal student loan debt can NOT be discharged through bankruptcy.

 

[Darcy03231]

On the flip side of that, if something that bad happens down the road, many states will let you keep your primary residence in a bankruptcy...but federal student loan debt can NOT be discharged through bankruptcy.

That's right, but bankruptcy won't save you from foreclosure if you can't make your mortgage payments. Mortgages or HELOCs don't go away with bankruptcy either.

While a cash-out refi or HELOC are options for these types of expenses, especially with the rates as low as they are now, its still trading unsecured debt (student loan) for secured debt (mortgage). If you have student loan debt and can't pay your mortgage company isn't going to foreclose on your home. If you can't pay your mortgage, they will.

 

[*pixie*dust*]

Cash Out Mortgages aren't as common as they used to be. Depending on your equity and credit score, you might find the rate to be higher than you would expect, not to mention possible closing costs, appraisals, etc.

 

[Claudine877]

A Cash Out Refi is rare these days as qualifying is difficult. But regardless of HELOC or COR, it all depends on the rate and terms in the agreement of either. If you have a set rate and term that you can afford and need the $ for whatever, then you at least know how to budget. If you take the HELOC and it's a variable rate tied to the prime rate plus 1% or 2%, then it fluctuates and you can't really know what to expect. Also, many HELOCs try to get you to be interest only for X many years, then flip to a fixed rate payment. You need to plot out worst case scenario and check the agreement for the ceiling rate(how high are they allowed to go) for each type of offer the bank puts to you and see if you can fit it into your budget. Then you know how to proceed. 17 years in Mortgage here for your assistance!

 

[2TxAgs]

Thanks for all the feedback. We qualify and could get the cash-out for as little as 3.5%, and the terms would not make my mortgage payment any higher than what I pay now (I pay over every month; I consider it one of the fixed rate parts of my savings plan). If I did this, it would add another couple of years to my loan, but according to my calcs on bankrate dot com, I come out with the same total interest being paid as I do now with my current loan.

So: current loan at 4.5%, payoff in 10 yrs, XX total interest paid
Or: refi with about 30k cash-out, loan at 3.5%, payoff in 12 yrs, same XX total interest paid

I have never considered/needed a HELOC, so wasn't clear on what it was, but talked to a bank guy earlier in the week, so now I'm "in the know" on that.

Not sure where I'll go with this - don't need the money today, I could use it in about a year, so I'm just playing with the numbers to see what makes sense. I don't want to lose the great rates... Thanks again to those who responded!


TxAg

 

[hsmamato2]

OP also wanted to add...budget style... it sounds like you;ve got a handle on your finances...but think carefully about doing this,is the money needed for something that will still hold it's value (or more) to you in 12 years? i.e.- a new car,or vacation ,or new toys,wouldn't hold value,like the home you;re working on paying off....and if you're going to remortgage your home for this expense,make sure that it's as BIG and IMPORTANT as your home itself. that's my aside to the actual money question