If you are considering a cash-out refinance, it’s important to understand the pros and cons. Refinancing for cash-out can be a great way to pay for home improvements or create cash flow. However, this type of loan may not be right for everyone as there can be significant drawbacks if your circumstances change in the future.
Let’s get into the ins and outs of cash-out refinancing and help you make an informed decision about whether or not this financing option is right for you.
What is a Cash-Out Refinance?
A cash-out refinance entails refinancing your existing mortgage for more than you owe on your house with a new home loan. The extra money goes to you in the form of cash, and you may use it on home enhancements, debt consolidation, or other financial needs. You must have equity in your property before taking out a cash-out refinance.
When considering cash-out refinancing it is important that you understand what your new monthly payment and loan terms will look like. If interest rates have gone down since purchasing the house, then a cash-out refinance to pay down debt or improve your home could be a great option for you. If mortgage rates are lower than credit card rates, it may be the right way to go when financing large projects. However, if interest rates have increased, then you may want to seek other options that are more financially viable to obtain the money you need.
The Pros of a Cash-Out Refinance
- A cash-out refinance can be a great way to pay for home improvements. If you are looking to renovate your home, a cash-out refinance can provide the funds you need.
- If the money from a cash-out refinance is used to improve your home, you could be eligible for the mortgage interest tax deduction.
- It can also be a good way to consolidate debt or cover other expenses. If you have high interest credit card debt, for example, refinancing and taking out cash could be a smart move.
- Consolidating debt to pay off a high-interest credit card could improve your credit score by lowering your credit utilization ratio.
- If you bought your home some time ago when interest rates were much higher, you may be able to get a lower interest rate on your mortgage through a cash-out refinance.
The Cons of a Cash-Out Refinance
- Because you are increasing the length of your loan, you’ll be paying more interest. It’s important to look at the amortization schedules for your current loan and the new loan to determine how much of a difference this will make for you in the long run and if it’s worth it.
- Because refinancing still requires that you pay closing costs, a cash-out refinance is generally a more expensive way to consolidate your debt.
- A cash-out refinance comes with a risk of foreclosure since the loan is secured against your home. If you are unable to make payments in the future, you could lose your home.
- Depending on the size of the loan, a cash-out refinance could require you to pay PMI again, which typically ranges from 0.55% to 2.25% of the loan amount each year.
- If you used the cash from your cash-out refinance to pay off high-interest credit cards, it’s important not to run up the balances on those credit cards again – a temptation that can be difficult to resist for some people.
In conclusion, cash-out refinancing has both pros and cons that should be considered before deciding whether or not to pursue this type of financing. While there might be benefits such as lower interest rates, cash back options, and possible tax deductions with a cash-out refinance, there are many factors you will need to consider before determining if a cash-out refinance is the right move to help you meet your home financing and other financial goals. If you’re ready to explore your refinancing options, get started now!
