The option to tap into your home equity and get paid cash by taking a bigger mortgage seems like an excellent idea. However, it’s important to think things through when making any financial decision. If you have been building your equity for a while, you may be able to get a lot of money from a cash-out refinance. This money can come in handy in financing various expenses. Before settling on a cash-out refinance mortgage, you need to weigh the pros and cons to determine if this is truly a great idea.
Pros of a Cash-out Refinance
• You Can Get a Lower Mortgage Rate
Refinancing your mortgage can be very beneficial as long as you can get a lower rate. It’s crucial to look way past the cash you will get paid after taking a cash-out to refinance. A lower interest rate ensures you save more money on monthly installments.
• It’s Cheaper than Personal Loans and Credit Cards
If you compare the interest rates of personal loans and credit cards, cash-out refinance rates tend to be lower. This is even when you include the closing costs. Suppose you have an upcoming expense; you will save more money when you borrow from cash-out refinance than personal loans or credit cards.
• It’s an Opportunity to Improve Credit Score
Should the funds obtained from a cash-out refinance be used to consolidate debt, that can improve a homeowner’s credit score. With a good credit score, you will enjoy lower rates in the future and access to many financial options.
• Borrowers Can Enjoy Tax Deductions
A cash-out refinance can benefit from interest deduction during the period of paying taxes. This is as long as the funds are used to meet IRS eligibility requirements.
• Grants Access to More Funds
If there is a significant expense around the corner, such as college fees or costly home renovations, a cash-out refinance grants homeowners access to more money.
• It’s One Loan
Compared to other alternatives, with cash-out refinance, you will only be paying one loan. Most borrowers find it easier to manage one loan than to deal with several.
Cons of a Cash-out Refinance
• Risk of Foreclosure
It would be best to remember that a cash-out refinance is still a mortgage, and you will be putting your home as collateral. Inability to repay the loan could lead to losing your home.
• The Terms will Change
Being a new loan, homeowners should expect a change in terms. It’s crucial to go through the fine print of the new loan and ensure it’s favorable for your situation.
• May Take Some Time
The money that one gets from a cash-out refinance isn’t given right away. The underwriting process can take some time. This may not be such a great idea for individuals in urgent need of cash.
• Closing Costs
Closing costs must be paid when taking a cash-out to refinance. It’s often a fraction of the total costs, and the percentage may differ from one lender to another.
Scenarios When a Cash-out Refinance is a Great Idea
1. When Funding Home Renovations or Improvements
Be it getting a kitchen to remodel or adding a new room, using equity to improve a home is a brilliant idea.
2. When Consolidating Debt
If you have several debts, taking a cash-out to refinance allows you to merge all these debts into one loan with a low-interest payment.
3. When Building Up a College Fund or Boosting Retirement Savings
Cashing out your equity is a smart move if you don’t want to tie your funds to your home. This mortgage frees up money that can be used in saving for retirement or college.
4. When You Want a Lower Interest Rate
Since cash-out refinance has a lower interest rate than credit cards and personal loans. It makes more sense to go with an option that will save you more money in the long run.
Two main things determine whether a cash-out refinance is a great idea or not. One is if you get a low-interest rate, and the other is if you put the money to good use. It wouldn’t be a great idea to get a refinance to buy a car or fund a vacation.