When it comes to real estate, refinancing is a popular way to make homeownership more affordable and to free up some cash.
Mortgage refinancing typically extends the terms of your loan, resulting in a lower monthly payment. In some cases, it may also include changing from an adjustable-rate mortgage to a fixed-rate loan or from one type of interest rate to another.
In this article, we will be talking about cash-out home mortgage refinance, how it works, and its pros and cons. If you are interested in refinancing your home or are looking for additional cash, continue reading to learn more.
What is Cash-out home mortgage refinancing?
In a cash-out home mortgage refinancing, an old mortgage gets replaced by a new larger mortgage. The new mortgage will be bigger than the old one to allow homeowners to get some cash. A refinance can help you free up some extra money for repairs, debt consolidation, home improvements, or other expenditures.
Cash-out refinancing is generally more complicated than standard refinances. Since now you have a larger mortgage with different terms, it’s important to be sure that you understand your loan terms and repayment plan before refinancing.
How does cash-out refinancing work?
The process for cash-out refinancing is usually the same as it is for other types of refinances. The main difference is that you will be using your home equity to get some cash. Cash-out refinancing involves paying off your existing mortgage, taking out a new loan to replace it, and then pocketing any remaining cash.
For example, let's say your home is valued at $300,000 and you have a mortgage debt of $150,000, which gives you $150,000 of equity in your home. If you refinance, you could get a new loan balance of $200,000 and receive $50,000 in cash at closing. So now you can use that $50,000 for whatever you need!
Pros and cons of cash-out refinancing
As with anything, there are both pros and cons to cash-out refinancing. This is helpful when you are figuring out if this option is for you or not.
Pros of Cash-Out Refinancing
Here are the benefits of Cash-out refinancing
1. Access to more funds: Some homeowners want to use cash from their home’s equity for a variety of reasons. These include installing a pool, repairing an old roof, fixing up your kitchen or bathroom, consolidating debt, and more.
2. Lower interest rates: This is one of the main reasons why people consider refinancing. In some cases, you can lower your interest rate by as much as half a percent which reduces your monthly payment and gives you more money to use each month.
3. You can improve your credit score: A refinance can also boost your credit score, particularly if you lower the amount of money you owe on your mortgage. This credit improvement may allow you to qualify for loans with better rates in the future.
4. Longer repayment terms: If you have a high loan-to-value ratio, refinancing your mortgage can help you get a lower interest rate by extending the repayment term. You can stretch it up to 15-30 years.
5. Tax benefits: Finally, homeowners who refinance often get to deduct the points they pay on their new mortgage from their taxable income each year. This can lower your tax burden and give you a little extra cash in your pocket.
Cons of Cash-Out Refinancing
As we all know, everything good comes with a price, so does refinancing. Here are the negatives of cash-out refinancing:
1. Risk of foreclosure: Cash-out refinancing comes with a greater risk of foreclosure. If you don’t make your payments, you can potentially lose your home. So make the decisions wisely and make sure you can continue making your monthly mortgage payments.
2. Closing costs: Another downside of cash-out refinancing is the upfront costs. The new lender will charge you points and closing fees for taking out a larger loan to cover your house’s equity. You may also have to pay “good faith” deposits depending on your state or local laws.
3. You might have to repay for decades: Although it can be beneficial for some borrowers, others might find it difficult to repay their new mortgage for 30 years. Knowing your financial capability is very important before applying for this type of refinancing.
Cash-out refinancing is a great option if you want to consolidate debt, invest in some projects, renovate your home or just have a little extra spending money each month. However, this type of refinancing always comes with some risk and you should do it only if you are sure that you can repay the debts on time. Also, make sure to understand all your terms before signing the papers.