 Cash-out
refinance can make sense
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 Dear
Dr. Don,
I am thinking of refinancing my home. I owe $64,000 and the
home is worth about $265,000. My current interest rate is 6.625 percent. I wanted
to get cash out and also pay off my car loans. I plan to borrow $140,000 at 5.84
percent. Do you think this is a good idea?
Thank you,
-- Mike Mortgages
 Dear
Mike,
A lower interest rate on the loan, combined with potentially being
able to use the mortgage interest expense, can make mortgage debt
an attractive alternative to staying in your car loans. The IRS,
in Publication 936, Home Mortgage Interest Deduction, has a flowchart
that walks you through the decision variables that determine if
your mortgage interest is fully deductible.
I'm a little perplexed as to how you will get a 30-year,
fixed-rate mortgage at an interest rate below 6 percent when Bankrate's
national average is 6.32 percent, but you didn't state that you're
looking at a conventional 30-year mortgage. If you're looking
at an option ARM or some other type of variable rate product, then
you're taking on some interest-rate risk in refinancing and you
have to be willing to accept that risk.
You didn't say how much of the cash out was going
toward paying down the car loans and how much was going for other
things. Replacing your car loans with a mortgage loan just
restructures your debt; you're not taking on additional debt or
paying it off either -- you're just moving it. Make sure there's
no prepayment penalty on the car loans before taking this step.
Taking 30 years to finance a car might not make sense,
but you can rationalize that the payments in the early years are
used to pay off the cars and it's the later payments that go toward
paying off the house.
Like any refinancing, how long you plan to be in the
house influences whether it makes sense to do the refinancing. If
you're not in it for the long haul, then the closing costs outweigh
the potential interest savings and tax deductions.
Bankrate's refinancing
calculator can help you decide on the refi portion of the loan. The
cash-out option depends on the interest rate and remaining term
of your car loan. Use Bankrate's interactive work sheet, "Can
you borrow from your home equity?" to see if tapping your
home equity for the cash-out refinancing makes sense with your current
finances.
To ask a question of Dr. Don, go to the "Ask
the Experts" page and select one of these topics: "financing
a home," "saving & investing" or "money."
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