If you’re a homeowner looking to take advantage of the equity you’ve built in your home, you might consider how a cash-out refinance could help you meet your financial goals. Like any financial decision, it’s best to get a good look at how this might impact your finances as a whole. In this post, we’ll answer the following questions, and more.
What Is A Cash-Out Refinance?
A cash-out refinance is a loan that allows homeowners to use the equity they’ve built up in their home to take out a lump sum of cash to help take care of expenses, such as home repairs, improvements, or to pay off high-interest debts. Cash-out refis can technically be used for whatever the borrower pleases, but certain uses may be more beneficial than others.
Why Do People Refinance?
There are several reasons people choose to refinance their mortgage with a cash-out refinance or another refinancing method. Here are a few of the most common:
Reducing Your Interest Rate: Refinancing your loan could help you secure a lower interest rate than you had when you got your original loan – especially if your credit score has improved. When you refinance with a lower interest rate, more of your monthly payment goes toward the principal rather than interest, which could also help you pay off your loan quicker!
$350,000 + $35,000 = $385,000
Pros And Cons Of Cash-Out Refinances
Your home is likely one of the biggest investments you’ll make in your lifetime, so it’s important to think critically before deciding if you should take out a cash-out refinance. Here are some of the pros and cons you might want to consider before following through with a cash-out refinance.
Pro: You Can Make Home Improvements And Renovations
You can use the money you take out from a cash-out refi to reinvest in your home by making improvements to your property. From leaky faucets to adding amenities, cash-out refinances can be a great way to add value to your home.
Pro: You Can Consolidate Debt
Another way you can use the borrowed funds from a cash-out refinance is to help you consolidate high-interest debt, like credit cards.
Pro: You Can Get A Lower Interest Rate
As we mentioned before, getting a lower interest rate is one of the main reasons homeowners choose to refinance their mortgage. If you’ve built up equity in your home and raised your credit score, you may be able to secure a much lower interest rate than your original mortgage. This means more of your monthly payments go toward paying off the principal rather than interest payments.
Con: You Still Have To Leave Equity
Cash-out refinances don’t enable you to take out all of the equity you’ve built in your home. Lenders typically require homeowners to leave 15-20% equity in their home. This means that you should consider whether the amount of equity you can take out is enough to accomplish your financial goals.
Con: Associated Fees
To take out a cash-out refinance, you’ll likely need to pay several associated fees which, depending on the cost, could mean it might not make financial sense if you don’t plan on staying in the home long enough to break even or recoup that cost. Here are some of the fees you might expect to pay when refinancing:
- Appraisal fees
- Closing costs
- Attorney expenses
- Credit report fees
Con: Changing Loan Terms
When you refinance your mortgage, you’re replacing your original mortgage with an entirely new one. This means your interest rate and loan terms (maturity date, monthly payments, etc.) are all likely to change. Ideally, these modified loan terms would work in your benefit, but it can be challenging for some homeowners to adjust.
Con: Risk Of Foreclosure
If you opt for a cash-out refinance, you’re putting your property on the line in favor of quick cash because cash-out refis use your home as loan collateral. This means that if you fail to make your loan repayments, you could run the risk of having your home foreclosed.