refinance

Cash-out refinancing to make home repairs?

Don TaylorQuestionDear Dr. Don,
Is cash-out refinancing the best option for me? I owe $13,000 on a home appraised at $140,000. With the low rates, I'm working on cash-out refinancing for $100,000 at 4.6 percent over 25 years.

My house needs new garage doors, an air-conditioning unit, a new water heater, 600 square feet of flooring and new siding. My city is currently offering home energy audits and rebates for installation of a new AC unit, water heater, etc. I plan to stay in the house and want to retire in five years.

The money I don't use for house repairs, I plan to pay back to the bank. I've worked hard all my life for excellent credit and have taken care of my things to last for a long time. I can't afford a mortgage payment and home equity loan payment on top of it. My payments will be $900.

I'm on the fence about holding out for two more years to pay off the house before taking on the repairs. The AC and water heater won't last another year. Is this the best option for me? Please let me know.
-- Jackie Juncture

AnswerDear Jackie,
Deferred maintenance can bring down the appraised value of your home. If you plan to get the work done, and you're going to borrow against the equity in your home to do it, you might as well do it now while interest rates are low. This is especially true if you can capture some rebates on your planned purchases.

A cash-out refinancing is likely to be the best solution because it will have the lowest interest rate of the available financing options. Your other financing options are to take out a home equity loan or a home equity line of credit, or HELOC. These options wouldn't be on top of your current mortgage payment because you'd borrow enough to pay off the $13,000 you owe on your first mortgage.

The key difference between the home equity options and the cash-out first mortgage refinancing is that home equity loans tend to have lower closing costs. That said, the Bankrate national average for a home equity loan is 5.45 percent at this writing, and the national average for a home equity line is 6.74 percent. If the rate differentials are comparable in your market, the cash-out refinancing is the way to go.

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Make sure there's no prepayment penalty to pay down your mortgage if you have money left over after paying for the repairs. You could consider asking your bank to recast the mortgage after making a big additional principal payment. That would reduce your monthly payment but keep your loan term. Since you're so close to retirement, I'd recommend against that option. I'd keep the monthly payment the same and have the effective loan term reduced by making the additional principal repayment.

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