Jeb Smith - Should You Consider a Cash Out Refinance?

Short Summary

Main recommendation: Consider a cash out refinance only when the numbers and the purpose justify it, such as paying off higher-interest debt, funding home improvements that add value, or pursuing an investment with a clear return, and only after calculating the total cost against your monthly savings or payment increase. The speaker, a real estate broker who says he is not a mortgage professional and has no financial stake in the outcome, stresses that the decision is situational and should be reviewed with an experienced professional.

Key Points

• A cash out refinance replaces your existing mortgage with a larger loan; the difference, after paying off the old loan and closing costs, is paid to you in cash for any use.
• Using the cash to pay off higher-interest revolving debt, such as credit cards, can lower total monthly costs even though the mortgage balance rises.
• Improvements that add value can make sense if you plan to sell, since the speaker says he's seen sellers who just needed a little cash to do improvements that could help them get quite a bit more money for their property.
• Breakeven matters: divide closing costs by monthly savings to estimate how many months it takes to recoup the cost, and compare that to how long you plan to stay in the property.
• The speaker advises against pulling out all the equity without a specific plan, especially if the higher payment would not be supported by your income.

Details Worth Noting

• Concrete instructions:
  • Estimate the new loan amount: existing mortgage balance plus the cash you want, then subtract nothing for payoff since the new loan covers the old one (the example used a $300,000 mortgage plus $50,000 cash, for a $350,000 loan).
  • Calculate the cost: add up the lender's charges and closing costs for the new loan.
  • Calculate the monthly effect: compare your new payment with your current payment, including the savings from any debt you pay off (example: $1,000 of revolving debt paid off with a $100 payment increase saves $900 per month).
  • Find the breakeven period: divide total cost by monthly savings (example: $5,000 cost and $100 monthly savings gives about 50 months, just over four years; $5,000 cost and $900 monthly savings gives about five months).
  • If you refinance without a cash-out goal, skip it when you will not stay long enough to reach breakeven.
  • If using the cash to pay off debt, do not run the balances back up, or the new mortgage payment will be higher with debt back on the books.
  • If investing the cash, check that the investment produces cash flow or a known return that covers the higher payment before committing.
• The speaker says lenders generally do not care how the cash is spent, so the cost-benefit analysis is entirely your responsibility.
• Investing in a non-risky vehicle is mentioned as an option, but the speaker warns it is not right for everyone.
• The speaker recommends watching his related video on when not to refinance and common mistakes to avoid.

Bottom Line

A cash out refinance can be a sound tool for lowering debt costs, funding value-adding improvements, or supporting a documented investment plan, but it is not a default move; it works only when you can clearly show the payoff period and that you can comfortably carry the higher payment.