Chapter 13 Bankruptcy – What It Is & How It Works

petition for bankruptcy

Who is eligible for Chapter 13 bankruptcy?

Chapter 13 bankruptcy is reserved for individuals and couples, as opposed to corporations and partnerships. You’re most likely eligible assuming you have received credit counseling and possess a regular income sufficient for your living expenses.

Additionally, your secured debt must be less than $1,257,850 and your unsecured debt should be less than $419,275. If you had a bankruptcy petition that was dismissed with prejudice or for abuse in the last half-year, you cannot file until the 180-day waiting period has expired.

How does Chapter 13 bankruptcy work?

You and your lawyer will file all the necessary paperwork, such as the petition, a statement of financial affairs, the schedules, and your plan of reorganization.

You will pay a number of fees and possibly meet with your creditors, but your attorney will handle most details. If you plan to file on your own, you should be aware that the failure rate is very high.

In most cases, it’s highly recommended to hire a qualified bankruptcy attorney. Once your paperwork is submitted, your documents will then be reviewed by the Chapter 13 trustee and creditors. After that, you’ll begin your repayment plan.

Rather than discharging debts as in a Chapter 7 bankruptcy, Chapter 13 bankruptcy creates a multi-year repayment plan. You’re given a monthly payment amount based on your disposable income and necessary financial obligations.

That amount is then distributed amongst your qualifying unsecured creditors. You then have three to five years to resolve your debts. After you successfully complete the Chapter 13 repayment plan, your debts are fully discharged.

The entire process typically takes between three and five years of structured payments that are applied to your debt adjustment. Some debts won’t qualify for discharge, including federal student loan debt.

What will my duties be under chapter 13 bankruptcy?

Beginning April 1, 2019, when filing for Chapter 13, expect a certain amount of requirements to maintain your eligibility. For example, you must:

  • File all required tax returns before your creditor’s meeting
  • Send all creditors a notice of your bankruptcy
  • Maintain child support and alimony payments during your plan
  • Make all payments to the trustee during your adjustment period
  • Make all payments for agreed upon secured loans, such as your house and cars
  • Meet new tax obligations and not incur significant new consumer debt
  • Provide the trustee with annual tax returns and information changes in income
  • Get court approval for any new loan, or for buying, selling, or refinancing a home
  • No more than $419,275 in unsecured debts
  • No more than $1,257,850 in secured debts (including mortgages and car loans)

What is a trustee and what is their role?

The trustee is a representative of the bankruptcy estate who works for the bankruptcy court and the federal government to review bankruptcy petitions and schedules.

This person generally handles most of the issues related to the processing and approval of bankruptcy cases. The trustee also acts as the disbursing agent for your payments and provides oversight on issues that might arise.

What is the role of my attorney?

In Chapter 13 bankruptcy, your bankruptcy lawyer generally analyzes all the particulars of your situation and prepare your estate, allowing you to keep as much of your property as possible. He or she will assemble all your information and data and handle your court paperwork and deadlines.

Your attorney will prepare your petitions, schedules, and statements for filing, draft your plan of reorganization, and help you understand your duties. Attorneys will also meet with your creditors, attend hearings and address issues with the trustee.

Additionally, attorneys will make necessary petitions and modifications if you need to change your Chapter 13 plan. They are now more liable for inaccuracies and other problems that could arise in connection with your Chapter 13 case.

This means that many of the burdens of bankruptcy are taken off you and become the attorney’s responsibility.

Attorney’s fees vary from state to state but expect to pay anywhere between $1,200 and $2,500. Given the level of responsibility they carry on your behalf, it’s well worth the investment.

How does Chapter 13 bankruptcy affect my credit?

Chapter 13 bankruptcy will be publicly listed on your credit report for a total of seven years, during which time your credit will be negatively affected.

However, your score will slowly increase as you establish a positive payment pattern during your adjustment period, and it will continue to increase as long you keep up with your payments.

You can also expect an increased difficulty in obtaining credit. If you do qualify for a credit card or loan, you’ll pay some of the highest interest rates on the market.

You’ll also only qualify for smaller credit amounts so it will become especially important to save up cash reserves to have on hand for any financial emergencies that pop up.

What are exemptions in Chapter 13 bankruptcy?

Under Chapter 7, every state has a list of exemptions for things that don’t need to be sold to pay back creditors.

Usually, there is a monetary limit for each category of property you own, whether it’s your home, your car, or your household possessions. Under Chapter 7, your creditors have the right to liquidate assets not protected by this exemptions list.

In Chapter 13, however, instead of having those items liquidated, you must pay to creditors, as part of your adjustment plan, their full value. To fully understand how exemptions work in your situation and state, it’s helpful to talk to a lawyer.

What if I am self-employed or a business owner?

If you are self-employed or operate your own business, you must file a monthly financial report or business operating statement with the trustee before the 15th day of each month.

You’ll also need to verify your income before you file for Chapter 13 bankruptcy. If you own your own business, it’s even more important for you to maintain thorough documentation of your financials both before and during Chapter 13 bankruptcy.

What if I can’t continue to make all my payments?

If a situation arises under Chapter 13 in which you’re unable to make all your required monthly payments, you must show that it results from a serious income change or a necessary expense. Your lawyer must then file a moratorium with the bankruptcy court and creditors, which is subject to approval by the trustee.

In most Chapter 13 cases, you should be able to get approved for some type of catch-up plan, including lengthening your repayment term if you’re just suffering from a short-term financial setback.

For a long-term issue, you can apply for a modification. In the event of a severe hardship that makes it impossible for you to make your Chapter 13 payments, you can request a hardship discharge.

Another option is to convert your bankruptcy to a Chapter 7 and have your remaining eligible debts discharged. This is only possible if your new financial situation meets the income qualifications for Chapter 7 bankruptcy.

A final option is to dismiss your current Chapter 13 and file for a new one. Just make sure you request an automatic stay from the court to ensure creditors don’t resume their collection attempts as you pivot to a new bankruptcy plan.

Should I file for Chapter 13 bankruptcy?

There’s no right or wrong answer to this question. One of your first steps should be to undertake free credit counseling to see if you can figure out a manageable debt payment plan that works for your current situation. If not, you should then seek professional legal help.

It’s great to read up on the pros and cons of bankruptcy, but at the end of the day, so much depends on your personal situation. From your money to your state, there are countless small details that could influence what it means to take the best course of action.


How To Calculate Debt-to-income Ratio

Your debt-to-income ratio is crucial, especially when you apply for a mortgage, home equity loan, or another large personal loan.

balanced rocks

By understanding what it is and what your target number should be, you can use your debt-to-income ratio to help get qualified for some of the best loans available.

Read on to find out how your DTI ratio could affect your next loan application.

What is debt-to-income ratio?

Your debt-to-income (DTI) ratio compares all of your monthly recurring debt to your gross monthly income to determine how easily you could potentially handle new, additional loan payments.

It’s a way for lenders to evaluate your level of risk as a borrower before approving your loan application. From their perspective, if you already have a lot of debt compared to the amount of money you bring in, it may be harder for you to repay another loan. That means the risk of loan default is higher the more debt you have.

On the other hand, if your debt-to-income ratio is low, it indicates that you’re more likely to have available income to put towards another loan. So the better your DTI ratio, the better chance you have of getting your loan application approved.

How to Calculate Your Debt-To-Income Ratio

So how can you calculate your DTI ratio? It’s an easy formula.

Start by listing out all of your monthly bills. This includes monthly rent or house payment, alimony or child support payments, credit cards, student loans, car loans, and any other monthly debt payments that you have.

Divide that by your gross monthly income (your income before taxes are taken out) and you get your current debt-to-income ratio.

Here’s a quick example. Say you have a $150 monthly car payment, $100 student loan payment, $1,200 mortgage, and $75 in credit card minimum payments. Your monthly debt obligations total $1,525. If your pre-tax monthly income is $4,000, you divide the two numbers to get 0.38, or 38%.

DTI ratio

When applying for a major loan like a mortgage, you also need to add in the expected monthly payment for your new loan or mortgage. That’s the percentage your lender looks at to determine whether or not your DTI meets their qualifications.

Let’s go back to the example above. Your current mortgage is $1,200 but you want to move into a larger home that would bring your monthly mortgage payment to $1,500. That increases your monthly obligations to $1,825 and your DTI ratio to 45%.

What is included in debt-to-income ratio?

A lender typically uses two sources for your financial information: your credit report and required documentation that comes from you. Your credit report supplies all of your credit cards and loan balances so lenders know exactly how much you owe.

The downside is that credit reports can take a month or more to update new information. So if you made a large payment on one of your credit cards a week before applying for your mortgage, that new balance might not be reflected on the credit report pulled by your lender.

Luckily, you can request a rapid rescore, which updates your credit report within just a few business days. Your lender pays for the cost of the rescore and you benefit from having a low and accurate debt balance for your DTI ratio.

Your lender will also ask you to verify your monthly income with documentation such as pay stubs and bank statements. You’ll also need to submit at least two years of W-2s and/or tax returns.

Some lenders also ask for an employment verification letter. This helps them determine exactly how much money you bring in each month that can be applied to your loan balances.

Does your DTI affect your credit?

It doesn’t directly affect your credit scores because your credit report doesn’t contain any information on your earnings. But just like your credit score, your DTI contributes to whether or not your loan application will be approved, so it’s an equally important number.

Plus, the balance information that goes into your DTI ratio also contributes to the “amounts owed” category of your credit score, contributing a full 30%.

So even though the calculation specific to DTI ratio isn’t included in your credit scores, addressing any issues you may have with debt will help both situations. When you manage your money wisely, you’ll reap the benefits in many areas of your finances.

What is a good debt-to-income ratio?

The answer to this question really depends on your lender, but obviously the lower your DTI ratio, the better. A lot of experts and conventional lenders use 36% as a target for individuals trying to determine how much debt is wise to carry.

But of course each situation is personal and depending on your other financial obligations, a higher or lower number may be appropriate.

It’s helpful to perform a simple financial audit of your personal budget to determine how much you can spend on a mortgage on top of your other payments, bills, and savings contributions.

Even if a lender says that you qualify for a certain mortgage amount, that doesn’t necessarily mean you can afford it. Plus, you also need to consider not just your monthly principal and interest payment, but also your taxes, mortgage insurance, and homeowners insurance.

All of that can easily add a couple hundred dollars or more to your monthly payment. Make sure you work with a lender whom you can trust and who has your best financial interests at heart.

43% Cutoff for Mortgage Loans

When you do apply for a loan, most lenders today typically use 43% as a cutoff. Anything higher and you automatically can’t get a qualified mortgage. You can figure out how much of your income is 43% by performing a simple equation.

Take your monthly pre-tax income figure and multiply it by 0.43. The number you get is the maximum amount of debt obligations you may have in order to qualify for a mortgage.

If you want to be more conservative, multiply your monthly earnings by 0.36. This is especially true if you’re in a higher tax bracket because you’ll lose more of your money to taxes before paying your bills.

Let’s take a look at these calculations with a real-life example. We’ll use the same scenario as before: your monthly income is $4,000 before taxes are taken out. For a 36% DTI ratio, your credit cards and loan obligations should total no more than $1,440 each month.

To qualify for a mortgage with a maximum 43% DTI and the same monthly income, your mortgage and other debt shouldn’t exceed $1,720 each month. Try the math using your own financial information and see where you fall.

How can you lower your debt-to-income ratio?

Since the formula for your debt-to-income ratio uses two different numbers, there are a couple of different ways to lower your DTI ratio. The first is to lower the amount of debt that you owe.

You can do this by paying off your credit cards or loan balances ahead of schedule. Even if you’re having trouble paying beyond your minimums, look at refinancing options to lower your monthly debt payments with a lower interest rate.

Balance Transfer Credit Cards

You might also have luck getting a 0% APR balance transfer credit card, but you want to make sure that you can either pay everything off before the introductory period ends or secure a lower interest rate than your current cards.

Find a Cheaper Home

When trying to buy a home, you can also look at properties in a lower price range because that will lower your monthly mortgage payment.

Ask your lender to provide you with a few different financing scenarios based on different prices and loan types. You could also pay a larger down payment to stay in the price range you want while lowering the loan amount.

Increase Your Income

On the flip side, you can also try to increase your income to help out your DTI ratio. Mortgage lenders typically want to see two years of tax returns to gauge your income level. A last-minute raise or second job may not reflect your income amount right away. It really depends on what type of documentation and salary history is required by your lender.

Cash Reserves

You might also be able to bolster your application by having a large amount of cash reserves on hand. So if you’re about to buy a large item (besides your house) it could help to hold off on spending the money until after you close on the loan.

Debt-to-income ratio is a simple calculation used by lenders when evaluating loan applicants. Now that you understand how it affects on your ability to get a mortgage, you can make more informed decisions on borrowing and spending.

Everything You Need to Know About Employer Relocation Packages

Moving for work? Make sure you know exactly how much help you can expect from your employer.

If your company has asked you to move to a new city or state for work, you’re not alone. Each year, nearly seven million people in the United States relocate because of their jobs.

Before you start packing boxes, it’s important to know what your employer will and won’t offer in terms of relocation assistance, and how that could affect both your move and your pocketbook.

Make no assumptions

Approximately 70 percent of U.S. companies offer relocation incentives for employees or new hires. If a relocation package isn’t discussed with your offer, you’ll need to start the conversation yourself. Ask for what you want, including all the services and compensation you’ll need for your move.

In 2012, companies spent an average of $19,303 to move a new hire renter and upward of $90,000 to move a current employee homeowner, according to the Worldwide ERC, the association for professionals who oversee employee transfers. Do your research to figure out what your move will cost, and make sure your relocation package is adequate. If it’s not, see if you can negotiate changes.

Ask about extras

No two companies offer the same relocation packages. Some will cover just the basics, while others will transfer vehicles, provide cultural training, help pay closing costs or mortgage points buy down, or even provide employment assistance for an accompanying spouse or partner.

If you’re a homeowner being asked to relocate, you’ll know you’ve hit the jackpot if your relocation package includes a Guaranteed Buy Out (GBO). With a GBO, the relocation company hires two independent appraisers prior to listing your home. If you’re unable to sell the property on your own within a certain time period, the company will buy your home for the average of the two appraisals.

Doing it yourself

If your company’s relocation package is of the barebones variety, you may want to explore your DIY alternatives.

Moving all your household items using your own vehicle is the least expensive do-it-yourself option, but it comes with risks. Without professional packing and moving services, you increase the chance of your belongings being damaged. This option can be physically and emotionally draining, plus it can take a toll on relationships with friends and family you’ve asked to help. This type of move works best if your new home is not far from your old one.

Another DIY option is renting a moving truck. A large-capacity truck is easier to load and unload than a car, and allows you to accomplish the task with fewer trips back and forth. In addition to the cost of renting the truck, you’ll need to buy gas to get the vehicle from one place to another, and you may be required to purchase additional insurance.

Self-service moving uses portable storage containers, and is a blend of DIY moving and professional moving. These services drop off large storage containers at your current residence. You pack and load the containers yourself, on your own timeline. When the containers are full, the moving company transports them to your new home or, if you’re not ready to move in just yet, they can take the containers to their warehouse, where they will store your belongings.

Tax implications

If your job requires you to relocate, your moving costs and the expense of traveling to your new location could be deductible if they meet certain IRS standards regarding distance and time worked after the move.

Payments made directly by your employer to your moving company do not need to be reported on your W-2 form. However, if your employer gives you a lump sum payment to cover moving expenses, that money is fully taxable as earnings. Depending on the program specifics, either you or your company must bear the associated tax cost of including these amounts in your wages.

Interpreting these tax laws can be complicated. Be sure to hold onto all your moving receipts and consult with your tax or legal advisor to ensure you stay on the right side of the IRS.

Ask questions, do your research and seek out professional advice to make sure your move is a good one.

Top photo from Shutterstock.


Originally published September 1, 2015.


The Latest Smart Home Tech to Add to your Home

Living in a smart house used to only exist in sci-fi movies. Fast forward to today and connected homes and smart gadgets are quickly becoming the norm. Smart home tech has transformed every aspect of home life, from security and basic kitchen tasks to how a house is built. It’s making our lives more comfortable, economical, convenient, and safe.

If you haven’t upgraded your home with the latest tech there are many ways to start. If your needs are relatively simple, there are affordable options that can bring about convenience, however, if you want to go all out you can create a fully connected and modern space. So, check out the latest top smart home tech products that you can add to your home today.

Smart Home Living Room

Smart Home Living Room

Voice Technology

Voice assistants

“Hey Alexa, play my workout playlist.” While voice assistants have been around since the early 2010s, it has taken us a while to get comfortable talking to devices. Today’s most popular commands include asking voice assistants to play music, answer a question, turn on the lights, provide the weather, and set reminders, alarms, and timers. As artificial intelligence (AI) advances, virtual assistants will become more personalized towards individuals. New features such as voice detection can recognize who is talking and create a unique, tailored experience, like calling you by a nickname or providing music recommendations that fit your style. 

Smart Home Tech on a shelf

Smart Home Tech on a shelf

Home Security 

Video doorbells, cameras, and alarm systems 

We have all heard stories about porch pirates stealing packages. One of the biggest smart home tech trends is investing in video doorbells, security cameras, and alarm systems. Grouped together, a standardized smart home security system may be one of the best investments you can make to protect your family and your home. Video doorbells and home security cameras now have live views and voice capabilities that allow users to see and speak to people at the door from virtually anywhere. Motion sensors can detect and record activity that can trigger an alarm or phone notification and alert authorities. Installing these can provide that added sense of security knowing that your home is being monitored 24/7. 

Fingerprint and facial recognition door locks

Installing fingerprint or facial recognition locks can change your life, especially if you always misplace your spare key. Biometric technology and Bluetooth have already made their way into phones and tablets, but they are now starting to become more common in door locks. With just a glance or fingerprint scan, a lock can recognize a person by targeting facial features or fingerprint patterns to detect whether they are welcome or not. Not at home or lost your key? This technology can also be synced with a phone app or Bluetooth so that owners can remotely lock and unlock a door at the touch of a button. 

Indoor drones

Imagine your own personal security guard patrolling the halls while you are not at home. While this might not be common today, drone innovation has made strides within the home security space. Unlike traditional video cameras, drones provide better ground activity and can cover more areas. While you are away, automated drone technology will fly inside your home monitoring different rooms and areas. Take it a step further, users can create map paths for the drone to follow.

New Smart Door Lock Tech

New Smart Door Lock Tech

Sustainable Smart Home Tech

Solar panels 

Using solar panels for on-site energy generation has become a popular alternative to traditional electricity, especially in cities that get a lot of sun year-round like Miami, FL. Now, architects and designers are finding unique ways to incorporate solar panels into the design of a home, not just on the roof. Solar panels can be used in different ways that can save homeowners hundreds of dollars per month such as heating water, providing energy, and charging electric vehicles. They are also likely to enhance your home’s value, and depending on where you live, you can even earn tax credits and rebates.

Living plant walls

Plants are a fun way to bring color and life into your home. Living walls also known as green walls, can be a great way to style plain backdrops to create a striking focal point in your home. Besides design, living walls serve multiple sustainability purposes. They can be used to improve air quality as a natural air pollutant filter, serve as a noise buffer, and create added insulation during the winter months. Living walls can also be configured to filter out water from sinks, showers, and appliances. Water is redirected to the top of the wall, filters and irrigates plants, and is treated for reuse, creating the ultimate smart home tech piece for the environment. 

Solar Panels on Roof of Home

Solar Panels on Roof of Home

Home Fixtures

Human-centric lighting 

Light bulbs are a great entry-point into smart home tech. Connected to a smart device, lightbulbs can help you look like you are home when on vacation, change colors based on mood, save on energy consumption, and conveniently turn off all the lights with a single voice command. Using smart home lights throughout your house can also drastically upgrade the look and feel of a room or outdoor space. Consider adding smart light bulbs to your kitchen, bedrooms, and even driveway to adjust hue and brightness based on what you might be feeling.

Programmable thermostats 

Many people are not aware of how much a thermostat impacts the household budget. According to the U.S. Department of Energy, heating and cooling costs accounts for half of the average home utility bill. Smart thermostats seek to tackle this problem. Within one week of installation, smart thermostats can learn schedules to modify temperatures based on household activities. They can also track daily and monthly usage to get a sense of where heat and air are being directed to and adjust temperatures accordingly based on the season. 

Smart Home Thermostat Tech

Smart Home Thermostat Tech

In the Kitchen 

Kitchen appliances

For those who love to cook, consider adding smart appliances into your kitchen. Modern-day fridges can take phone calls, link to television, save energy, and provide recipes. However, new fridge tech has not stopped there. If you are out and about at the grocery store and want to check what needs to be replaced, some fridges allow you to access built-in cameras via your smartphone to see what’s inside your fridge no matter where you may be. Smart ovens are also starting to incorporate phone connectivity. People can preheat their oven on the way home, adjust timers remotely, and have notifications sent via text message when food is done cooking.

Kitchen counters and workspaces

Ditch the granite countertops and go with a smart work surface. One of the latest technologies in kitchen countertops includes a sink that can disappear and reappear with a single wave of the hand. Smart home tech also seeks to tackle problems such as food consumption. Kitchen scales are being embedded into the stone that can allow sensors to measure and weigh ingredients. With the data, a mobile app can provide curated recipes with the goal of preparing delicious meals without food waste.

Smart Home Kitchen

Smart Home Kitchen

Spa Bathrooms

Smart showers & chromatherapy bathtubs

The perfect shower concert just got easier. A fun way to spruce up your bathroom time is by installing a Bluetooth speaker showerhead. These speakers easily connect to your phone to blast your favorite tunes while taking a shower. For something more sophisticated, showers are starting to double as steam rooms by trapping vaporous steam to elicit pore opening moisture. If you’re looking to relax after a long day at work, Chromatherapy, or color therapy bathtubs, can help put your mind and body at ease by using colored lights to elicit feelings. 

Touchless toilets and digital bidets

The toilet is one of the most germ-ridden locations in your home. Highly advanced toilets seek to keep things clean and comfortable by integrating features such as self-opening and closing lids, heated seats, deodorizing systems, and temperature-controlled water. For freshening up, digital bidets also can be automated for hands-free operation. Two self-sterilizing nozzles spray gently aerated spritzes of water which can be adjusted for temperature, pressure, and spray width. They even come with an air dryer and deodorizer. 

Smart Home Tech Bathroom

Smart Home Tech Bathroom

Making a Smart Home Gym

Touchscreen fitness mirrors

Smart home tech is bringing the gym to you. Touchscreen, wall-mounted fitness mirrors are the latest craze in home gym technology. If you are missing the instruction and motivation of an in-person trainer, simply turn on the screen and let an AI trainer provide guided workouts and fitness programs that fit your liking. New tech also includes virtual spotters, sensors to monitor every rep, and measuring your progress in real-time. Remote group training has also become more popular, and groups can virtually work out together from the comfort of their home while still keeping the workout, music, and atmosphere people love about a local gym.

Workout equipment

If curating your workout is your thing, there are many products to help you keep track of your fitness goals. Smart dumbbells and kettlebells can automatically change weights up to 42lbs and track reps from the touch of a button. These are perfect for smaller home gym owners looking to get in simple workouts such as shoulder presses and deadlifts. Punching bags with smart technology are a great way to blow off some steam. These punching bags come equipped with trackers that you wrap around your hand to track punch speed and the number of punches via an app. This is perfect for the person who loves a quick and specific workout. Stationary Bikes are a great way to get in that much-needed cardio, the newest technology offers pre-recorded classes that sync to the mechanics of the bike to automatically adjust resistance and incline as well as the ability to sync to smartwatches. 

Gym Equipment

Gym Equipment

Redfin is not affiliated with nor endorses or guarantees any of the products or services mentioned.


Cash Out Refinance: What Is It and How Does It Work?

There may come a time when you need to access a large amount of cash to pay off credit card debt or fund home improvements. And when that happens, you can consider using one of the greatest assets at your disposal — your home’s equity.

couple on laptop

A cash-out refinance is a mortgage refinancing option that allows you to renegotiate the terms of your mortgage and turn your home equity into cash. This article will explain what a cash-out refinance is, the pros and cons, and how to determine whether it’s right for you.

What is a cash-out refinance?

A cash-out refinance is a way to access some of your home’s equity. You’ll refinance your existing mortgage at a higher amount, and then you get to keep the difference.

For example, let’s say you own a $250,000 home and still owe $200,000. If you want $20,000 in cash, you’ll do a cash-out refinance for $220,000. $200,000 will go towards your mortgage, and you’ll receive a cash payment of $20,000.

Cash-out refinancing is different than simply refinancing your home. When you refinance, you take out a new loan for the same amount but at a lower interest rate.

Similar to a home equity loan, the goal of cash-out refinancing is to lower your interest rate. With a cash-out refinance, you’re turning the home equity into cash. Cash-out refinancing is usually less expensive than a home equity loan.

What are the pros and cons of a cash-out refinance?

There are advantages and disadvantages to any financial decision, and this is certainly true for a cash-out refinance. Understanding some of the pros and cons can help you decide whether this is the right move for you.


  • Consolidate debt: The average interest rate on credit cards is 17.25%. But if you’re carrying a balance from month to month, this can add up to a lot of money in interest. Using a cash-out refinance to pay down credit cards can save you thousands of dollars.
  • Fund home improvement projects: Home improvement projects are usually a good investment because they increase the value of your home. However, not all projects will add the same amount of value, so make sure you do your homework first.
  • Boost your credit score: If you use the money to pay off debt, this will lower your credit utilization. This impacts your credit score by up to 30%, so reducing this can improve your score.
  • Improve your home loan terms: When you refinance your home, you’re replacing your current mortgage with a new one. This could mean shorter payment terms, and you may be able to qualify for lower interest rates.
  • Possible tax deduction: If you use the money to improve your home, you may be able to take advantage of the mortgage interest deduction. You should consult with a tax professional to find out if you qualify for the deduction.


  • Private mortgage insurance (PMI): If the value of your home falls below 80%, you’ll have to pay PMI. PMI costs between 0.5% to 1.0% of the total loan amount. So you need to be sure the benefits you stand to gain outweigh these costs.
  • You’ll have new mortgage terms: In some situations, taking out a new loan with new terms could be an advantage to you. But if you already have a very low interest rate, this could work against you. Make sure you understand the terms and conditions before agreeing to anything.
  • Closing costs: When you refinance your home, you have to pay closing costs, which are the fees paid to finalize a real estate transaction. These costs are usually between 2% and 5% of the loan amount, so this will be thousands of dollars you’ll have to pay out of pocket.
  • Won’t fix bad financial habits: Using a cash-out refinance to pay down debt can be a smart decision. But it won’t help you if you rack that debt back up again. Make sure you work on improving your financial habits so you don’t stay stuck in a cycle of debt.
  • You put your home at risk: With a cash-out refinance, your home is used as collateral to guarantee the mortgage loan. So if you’re unable to make your monthly payments, you are in danger of losing your home.

How can you use a cash-out refinance?

The money you receive from a cash-out refinance can be used for pretty much any purpose. You can use it to pay off high-interest credit card debt or for home renovations.

However, just because you can use this money for any expense doesn’t mean you should. Paying down high-interest debt is a good move because it’ll reduce the amount you pay in interest. And home improvements can help you increase your home’s value.

But it’s not a good idea to use a cash-out refinance to fund things like vacations or brand-new cars. The return on your investment will be minimal, and you’ll be putting your home at risk for very little reward.

Alternatives to a Cash-Out Refinance

Cash-out refinancing won’t be the right choice for everyone. If you need to access a large amount of cash but aren’t sure about a cash-out refinance, there are alternatives you can consider.

  • HELOC: One of the most popular alternatives to a cash-out refinance is taking out a home equity line of credit (HELOC). A HELOC is kind of like a personal loan and a credit card all rolled into one. It’s a revolving line of credit and is less expensive and less time-consuming than a cash-out refinance. Plus, you’ll only pay interest on the money you actually borrow.
  • Personal loan: If you want access to a large, lump sum of money, personal loans could be a good alternative. These loans are faster to process than a cash-out refinance, and you’ll pay off the money in a much shorter time period.
  • Look for other ways to find the money: And finally, you may want to consider if there are other ways you can find the money you need. Could you borrow the money from friends or family or take on a side job? This isn’t the most exciting alternative, but if you can make it work, it’ll save you from taking on more debt.


In the right circumstances, cash-out refinancing can be a good move. It can help you re-invest into your home, pay off debt, and improve your financial situation.

However, cash-out refinancing is not a quick fix. If you don’t change the behaviors that created the problem, you risk digging yourself into an even deeper financial home. Plus, you’re putting your home at risk in the process.

If you choose to go forward with a cash-out refinance, be sure to put your money to good use. Use this experience to put you and your family in a better position financially.


Mint Money Hub: What to Know About Coronavirus (COVID-19) and Your Finances – MintLife Blog

We will continue to add updates, so keep checking back for resources and answers to your questions.

First, we want to say that we hope everyone stays safe and healthy. Check out online resources from the CDC on guidance about the coronavirus disease (COVID-19).

Mint is tracking the latest developments and potential impacts COVID-19 may have on your finances, to provide you with as many helpful insights and resources we can to ensure your financial health remains intact, too — we’re all in this together.

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