Are you interested in making a home upgrade or consolidating debt? A cash-out refinance may be a good option to fund your financial goals while making your equity work for you.
What is a cash-out refinance?
A cash-out refinance is a loan on a property you already own that helps you use some of the equity you’ve built up in your home when you need it most.
When you take out a mortgage on a property and begin to make payments, the amount owed on the loan goes down while your equity in the property increases. This means you own a little bit more of your home with every mortgage payment you make.
With a cash-out refinance, you replace your existing mortgage with a new one that has a higher amount owed and pocket most of the difference.
Let’s say your home is worth $240,000, and the balance remaining on your mortgage is $115,000. That means you have $125,000 of equity in your home. With a cash-out refinance, you could refinance the $115,000 balance into a new $190,000 loan and receive $75,000 minus closing costs after the transaction is complete.
A cash-out refinance may be a good option to consider when:
- Your home’s value increases significantly and interest rates are low
- You want to renovate or upgrade your property
- You’re interested in expanding your investment portfolio
- You want to consolidate debt or cover an unexpected financial burden.
Pros and cons of a cash-out
refinance
A cash-out refinance can be a great tool to help you meet your goals, but there are a few potential drawbacks to consider as well.
Pros
- Generally, you have access to a larger number of different loan programs (i.e. fixed and variable rate options) compared with other home equity loan programs
- You have just one mortgage payment to make versus two payments
- They offer stable, fixed interest rate options in addition to adjustable-rate options
- There are no limitations or restrictions on how the cash can be used after closing
- You may be eligible for possible tax deductions if the money funds significant home improvements (Consult your tax advisor to be sure.)
Cons
- They may require more documentation and take longer than getting a Home Equity Line of Credit (HELOC)
- You have to pay closing costs that eat into the equity you have available
- You may have an added cost in the form of private mortgage insurance (PMI) if your new mortgage balance is more than 80% of your home’s value
Ready to take the next step?
Contact a mortgage loan officer to learn more about getting started.
When to avoid a cash-out
refinance
While there aren’t any limitations on how you can use the money you get out of a cash-out refinance, there are situations where it may not be the most cost-effective way to meet your financial goals.
Taking out cash to purchase a vehicle, fund the trip of a lifetime, or pay for any short-term project doesn’t make sense in the long term.
For example, using a cash-out refinance to buy a new car eliminates the need for a car loan. But it stretches the money you borrowed to pay for it over the life of your new mortgage, which could be up to 30 years. So you could end up paying more in interest than you would have if you financed it and paid it off in five years with a traditional car loan.
One final word of caution about a cash-out refinance: avoid using it to enable reckless financial habits, like excessive consumer debt or risky investments. It takes years to build up equity in your home, and once the cash is gone, it’s gone.