To Cash-Out Refi or Not?

Question

I have a 3 option scenario and I really can't decide what's the best move here. Here's a little background on my husband and I's current situation.

We are focusing on rapidly paying off our debt. We have approx. $116k in debt (not including our home), which includes a car (9.5k), a personal loan for back taxes (19k), and two student loans (16k and 70k). We definitely have to refi the house because my husband's ex-wife's name is still on it (she signed a quit claim deed when they divorced years ago). The interest rate is also a bit high because they were so young when they bought it (5%).

So here are the options:

1. Basic refinance at 4.25% with current mortgage company. Lower monthly payment by about $140/mth. Gives us more money to pay off other debt with (debt snowball method). Closing costs are only about $1200.
2. Refi at same interest rate, however do a cash-out refi of $26k and pay off the 16k student loan + the 9.5k car. Free up an extra $525 month towards other debts. However, lose out on about $6k of equity due to closing costs/misc fees. When we sell our house, this would mean our current $65k of equity would then be about $35k. BUT we could pay off bigger chunks of debt faster.
3. Same scenario as above, except instead of paying off the debt, use the cash as a down payment for property that we want to build on one day. This puts our equity into another asset that will continue to grow in value until we are able to sell our home and build on it. We plan on selling in about 1.5-2 years.

All 3 scenarios get us within a few thousand dollars net worth difference, so that piece isn't huge. My biggest question - is losing out on the $6k of equity to the closing costs/fee worth the jump in paying off our debt or the gain of property? Or - would we better off refinancing only, taking less of a loss on the closing costs, and continuing to pay off our debt at normal speeds?

Answer 1

First off, it sounds like you're in a lot of debt already, so I would definitely not go with option (3) as that would just put you even deeper in debt, which you state is not your goal.

For (2) it sounds like you're paying $6k - $1,200 (plus a slightly higher interest rate on your existing home debt) for the privilege of having your debt be in the form of a mortgage rather than a car/student loan (which is arguably preferable, all other things being equal). The $525 "extra" a month is presumably that much (or more) less you'll be paying into the principle on your mortgage. All in all, hard to justify such high additional closing costs, especially for such a short period of time.

In addition, given your ~2 year timeframe, only having $35k equity you would may put you in a tight spot putting together a decent downpayment on your next property. Instead, I would opt for the basic refinance now knowing that any "extra" equity you have when you sell would still be available to be applied as a lump sum to your other loans (which you've still been paying off as fast as possible in the meantime).