The vast majority of homeowners in the US have debt. With so many of life’s big purchases impossible to obtain without credit, people have become accustomed to owing money. Unfortunately, it’s very easy to become burdened by debt. Credit card balances, student loans, household projects…all of these things can snowball into a big problem if they aren’t handled carefully. With a cash-out refinancing program, homeowners can refinance their existing mortgage and get cash back to help pay off these debts.
Here’s how it works: With a cash-out refinance, you refinance your mortgage for more than you currently owe and pocket the difference. For example, say you owe $100,000 on a $150,000 home and you want $10,000 to pay off other debts. You can refinance for $110,000 and walk away with a $10,000 check (minus any loan associated costs).
Like with any mortgage program, there are certain benefits and drawbacks, and cash-out refinancing is not for everyone.
Take a look at these pros and cons of a cash-out refi then talk to your mortgage consultant and tax professional about whether or not it’s a good option for you:
Potential Benefits of Cash-Out Refinancing
1. More cash
A cash-out refinance can improve your regular cash flow by paying off your high interest revolving debts. While you’ll still owe money (with your mortgage payment), you’ll reduce the number of people you’re obligated to pay back. And, hopefully, your interest rate and payment will be substantially lower. Some homeowners also use the extra cash to start a savings or emergency fund.
2. Tax benefits
When you roll your higher-interest debt into a mortgage payment, you stand to gain significant tax benefits since all or some of the interest in a mortgage may be tax-deductible.
3. Improved credit and better interest rates
Normally, cash-out refinance programs carry lower interest rates than other loans like fixed rate second mortgages or business loans. If you need a little cash to fix up your house or start a small business, a cash-out refinance might be a good option.
Additionally, by wrapping your debt into a lower-interest loan and paying it down or off, you may even improve your credit ranking.
1. Upfront Costs
It’s not unusual for borrowers to pay thousands of dollars in closing costs and fees. If you have a great credit score or a decent amount of equity, these costs could be a lot less. It all depends on your personal situation. These mortgage closing costs are typically taken out of the amount of cash out are trying to obtain.
2. Extended time for paying off mortgage
By refinancing, you may resetting the payment clock and extending the period of time you’ll owe on your home. While this might not bother some homeowners, others may shudder at the thought of having mortgage debt for another 15-30 years. Your loan’s amortization schedule will also likely start over again making more of your monthly payment be paid towards interest. Of course, if you’re shortening your loan term, say from a 30 year fixed rate mortgage to a ten year loan, your loan is not going to reset back to a 30 year amortization.
By extending the loan terms and increasing the amount you owe to the bank, you are putting yourself at a greater risk if anything unfortunate should happen. If you were to lose your job or become seriously ill or injured, you may be unable to make your mortgage payments – which could lead to foreclosure. This is why it is important to handle your debts carefully and have an emergency fund available.
To learn more about refinancing your home, check out the Mortgage Refinance Page on ForTheBestRate.com and/or talk to a trusted mortgage expert in your area.
Please note that we are not licensed mortgage or tax professionals and the information contained on this page is simply the opinion of the writer.