Should I do a cash out refi if I plan to buy another home in a couple years?

Question:

I’m struggling to decide if I should do a cash-out refi when my goal is to move out of my current home in one to two years. My motivations for doing the refi are to pay down credit card debt, to do some minor home repairs, and to get rid of my mortgage insurance. What factors should I weigh in deciding whether to do a cash out refi or just wait it out until I’m ready to buy in one to two years?

Answer:

If you’re able to refinance and get rid of your mortgage insurance, you should do that regardless, even if it’s not pulling cash out. If you are pulling cash out to pay off credit card debt, the good news is your scores will probably go up, so you’ll qualify for a better rate when you go to buy a new house. But, depending on how much cash you take out, the cash out refi may increase your mortgage payment on your current home. So keep in mind that if you plan to use the expected rental income of your current place when qualifying for a mortgage for your new home, you can only use 75% of the market rent. So take into account how much negative rent liability you can have and still qualify for the new house.

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