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Pros and cons of cash-out refinancing

Pros and cons of cash-out refinancing

October 4, 2016
cash-out refinancing
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Cash-out refinancing lets you turn the equity you’ve built up in your home into cash, which you can then use however you want. This can be great, especially if you plan to invest the money or use it for home improvements. But, if you throw the money on vacations and other expensive things, you may regret it.

Here are the pros and cons of cash-out refinancing:

Pros

One of the best things about cash-out refinancing is the fact that it comes with a lower interest rate than a home equity line of credit or a home equity loan. It might also give you a lower interest rate than the one you got when you bought the house.

Another good thing about cash-out refinancing is that the the extra cash can help you pay off high-interest credit cards. Thus, you can save hundreds of dollars in interest.

And don’t forget that paying off your credit cards in full means that you’re reducing your credit utilization ratio, and this will improve your credit score.

Last but not least, mortgage interest payments are tax deductible, unlike credit card interest. You can reduce your taxable income and get a larger tax refund.

Cons

The biggest con of cash-out refinancing is the foreclosure risk. Because you use your house as collateral, you can lose it if you can’t make the payments.

And just like any other new mortgage, it will come with different terms than your original loan. So check your interest rate and fees before signing anything. A mortgage refinance calculator can help you avoid any unpleasant surprises.

With a cash-out refinance you get turn the equity you’ve built up in your home into cash, but this doesn’t mean that you don’t have to pay anything. Those pesky closing costs are still there. So remember to check if the potential savings are worth the cost.

If you borrow more than 80% of your home’s value, your insurer will insist that you get private mortgage insurance. It typically costs from 0.05% to 1% of your loan amount each year.

Lastly, cash-out refinancing tends to enable bad habits in many people who forget that it’s very easy to spend cash. Unfortunately, once the money is gone, it’s gone. So, next time you go shopping, remember that you’re paying for all those expensive items that you don’t need with your house. Is it worth it?

Final word

Just like any other types of refinancing, a cash-out refinance comes with both pros and cons. However, if you’re careful and responsible, you can take advantage of everything it has to offer, while avoiding all the risks.

 

Gary Morgan

Gary Morgan is a Britain transplant. Finance background, enjoys tea, politics and soccer (or football for everyone across the pond). Get in touch with him via email

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