Home > Mortgages > What Should You Do With Extra Cash From Refinancing?

Comments 0 Comments

I was sitting in my local coffee shop recently and a gentleman sat down next to me with his friend. He was apparently a mortgage broker giving some business tips to a younger broker in order to help him increase his business.

Something I overheard him say caught my attention: “You can tell your borrowers that they can use cash from the proceeds of their refinanced mortgage to pay off their car loan. And, it is tax-deductible!” Then I heard the younger broker say “That is a great idea; I will start telling all of my customers about that.”

I did everything I could to not jump out of my seat and tell him no! After I cleaned up the coffee I spilled from the shock of hearing such a statement, I started to think that there are possibly thousands of borrowers following this errant type of advice.

So, let me provide some guidelines as to what things generally should and should not be funded by using proceeds from your refinanced mortgage.

Refinancer Beware

One thing you should avoid at all costs is using mortgage proceeds to pay off an auto loan. It is generally a terrible idea to pay off a 3- to 5-year loan with a 30-year mortgage, or even a 15-year mortgage.

Think about it: Assuming you opt for a 30-year mortgage, you will still be paying on your car when it is either lying in in a heap in the junkyard in 25 years or when it is part of the tuna can you opened for dinner last night. And you will be paying a great deal more in interest.

Assume you want to pay off a $10,000 car note with three years remaining at 9% annual percentage rate by using the proceeds from refinancing your mortgage at 4% over 30 years. If you had kept the car note, the total interest you would pay over the final three years would be $1,448. This cost is on top of the $10,000 principal you will have paid off.

However, if you roll that $10,000 debt into your new mortgage, the total interest you will pay over the life of the loan will be $7,187, or nearly five times more than the higher interest car loan! A better idea would be to refinance your car note to a new 3-year loan at 4%. The total interest payments you will make over the lifetime of your new car loan will only be $629, or about half that of your current loan. (A good credit score could help you refinance at a lower rate. You can see where you stand by viewing your free credit report summary on Credit.com.)

As for the broker’s claim that the loan will be tax-deductible, any additional tax deduction may help you in mid-April, but the massive amount of interest you will pay over the life of the mortgage will be much higher than any benefit you may reap from the potential tax deduction.

A Possible Exception

Besides car loans, you should generally not use mortgage proceeds to finance school loans (which may be deductible separately), boats, motorcycles or vacations.

If, however, you are only able to make the minimum monthly payments on your credit cards, it might make sense to use refinance proceeds to pay them off. Paying only the minimum amount due on a high percentage credit card will most likely take 20 to 30 years to pay off the card. For example, if you have a $10,000 credit card balance with an APR of 15% requiring a minimum payment of 1% plus monthly interest due, you will be paying on that card for around 30 years before you have paid it off. (You can crunch the math using this credit card payoff calculator.)

Transferring that debt to your tax-deductible mortgage may be a better idea as long as you don’t charge your card up again. It also is reasonable to use mortgage proceeds to pay off improvements to your home that actually add value to the home like an additional bedroom.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

More on Mortgages & Homebuying:

Image: gpointstudio

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team