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Could a cash-out refinance rescue your finances?

By sbup Staff

A rainy-day fund is supposed to cover three to six months of fixed expenses, such as health insurance, food and housing costs, in the event you suffer a loss of income. If you don't have enough set aside, you might be considering tapping into your home's equity to provide a cushion. But instead of a home equity loan or line of credit (HELOC), consider a cash-out refinance.

A cash-out refinance is when you take out a new loan worth more than the remaining balance on your old loan. The difference between the two loan amounts is essentially cash that you are taking out of your home's equity. Except, instead of paying the high rates associated with a home-equity loan, you benefit from historically low mortgage rates.

"Mortgage interest rates have dropped and many home equity lines of credit are gone or frozen," says Clare Stenstrom, a certified financial planner and partner with New York-based Bourne Stenstrom Lent Asset Management. "If you can qualify for a HELOC or a home-equity loan, you can qualify for a refinance, so consumers should take advantage of the lower rates on mortgages."

The national average on 15-year fixed rate mortgages (FRMs) is 5.37%, while the average for a home-equity loan ranges from 8.74% for a three-year loan to 9.56% for a 15-year loan, according to the manybanking.com Rate Index. If you live in North Carolina, for instance, you could refinance the remaining $100,000 balance on your old 30-year mortgage you started 15 years ago, with a $110,000 15-year FRM from SunTrust Banks (STI) at a rate of 4.875%. Refinancing the extra $10,000 would only cost you $79 more a month. You could even put that $10,000 directly into a money market account at 2.5% offered by Bank of the Carolinas (BCAR) or 1.77% offered by Carolina Trust Bank (CART) to help defray the interest payments.

While there are plenty of risks involved with dipping into your home's equity, chief among them is pulling too much out and ending up owing more than your house is worth, there are also plenty of risks involved with not having enough money saved up in your emergency fund. And if you can be disciplined enough to use that money only in an emergency, a cash-out refinance could be your ticket to financial security.

For more rate offers in your area, go to manybanking.com and enter your ZIP code.

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