Cash-out refinance is all about using the equity you’ve accumulated in your home. You can replace your current home loan with a bigger mortgage and use the difference between your current and new mortgage in cash. While cash-out refinance offers many opportunities, it’s important to do your research to determine if this is the best option for you.
What Does a Cash-Out Refinance Entail?
With a cash-out refinance, you get a new loan with the same amount as your current one. The new loan then replaces the original loan. The new loan usually has a lower interest rate and a shorter term. With a cash-out refinance, you also withdraw a portion of the home’s equity in a lump sum.
How a Cash-Out Refinance Is Similar to Your Initial Mortgage
The steps to get a mortgage for cash-out refinancing will be quite similar to your initial mortgage. These steps include:
- Submitting an application after selecting a lender
- Providing necessary documentation and waiting for approval
- Waiting out the closing period
Pros of a Cash-Out Refinance
One of the best ways to determine whether a cash-out refinance is right for you is to consider the pros and cons. Some pros include:
Lowering Your Cost of Borrowing
A cash-out refinance is known to be a less expensive form of financing. Mortgage refinance rates are typically lower than rates on personal loans or credit cards. Even when considering closing costs, they can be an excellent way to access a lot of money.
Improving Your Credit
If you use a cash-out refinance loan to pay off your credit, you have the opportunity to boost your credit score. This is primarily done by lowering your credit utilization ratio, an important marker for how your credit score is calculated.
Accessing Larger Tax Deductions
If you use your funds for home improvements and your project meets IRS requirements, you may be able to take advantage of an interest deduction when tax season comes around.
Cons of a Cash-Out Refinance
Despite the many benefits that can come from using a cash-out refinance loan, there are also potential downsides to consider. These include:
Increasing Your Interest Rate
While a key benefit of a cash-out refinance rate is to secure a lower interest, it is possible that you could increase your interest rate. If you have any questions on how to find the lowest interest rates, consult a mortgage broker.
Needing to Pay Private Mortgage Insurance (PMI)
For better or worse, you can withdraw up to 90% of your home’s equity with some lenders. If you do take out 90% of your home’s equity, you may need to pay for PMI until you are below the 80% equity threshold.
When you take out a cash-out refinance loan, you need to stay on top of your monthly payments. Failing to repay your loan means your house could be foreclosed.
Is a Cash-Out Refinance Right For You?
Really what this question comes down to is your intentions. A cash-out refinance can be a great way to fund home improvements, which would not only increase the value of your home and make it more comfortable to live in, but it could also earn you tax breaks. It’s also a good idea to use this loan type for investment purposes, such as building retirement savings or college education funds or purchasing an investment property. Additionally, since refinance interest rates are typically lower than other forms of debt, you could use the proceeds to pay off one loan to have a lower-cost monthly payment.
There’s a lot to think about with this type of loan. And we may be a bit biased, but we truly believe it’s in every homeowner’s best interest to fully understand their options before diving into a mortgage product. To set up a consultation with one of our loan officers, give us a call today at 541-275-1148 or send us a message.