The pros and cons of a cash out refinancing
What You’ll Learn
How a cash out refinance can give you money for your goals
The potential benefits of a cash out refinance
The potential drawbacks of a cash out refinance
A home is more than a place to live; it’s also a financial asset that can help you fund your goals at different stages of life.
With a cash out refinance, you can tap into that asset through your home equity — the portion of your home that you own. You can calculate this by measuring the value of your home minus the amount of money you still owe on your mortgage.
Here’s how it works:
Your current mortgage will be replaced with a new one, but for more than your current loan balance. The extra amount, which is based on a portion of your home equity, will then be distributed to you in cash after you close on your loan.
A cash out refinance can be a useful tool to give you access to money, and potentially improve your financial situation now and in the future. But, refinancing is a major decision. So, it’s worthwhile to evaluate the pros and cons to ensure it’s the right choice for you.
Pros of a cash out refinance
While the exact benefits will depend on your unique situation, here are some of the main advantages of a cash out refinance:
Potentially lower interest rate
The interest rate on your mortgage is how much you’re paying your lender for providing you with the loan. The mortgage rate you receive depends on external factors, such as economic and market conditions, as well as your own financial situation, like your credit score.
Do some research to see if mortgage rates have decreased since the last time you got your loan. And take a hard look at your finances. There’s a good chance a lower interest rate could translate to significant savings — both monthly and over time.
A longer loan term may mean lower payments
You might think that your monthly mortgage payments will automatically increase just because you’re taking out a larger loan balance. However, that’s not always the case.
Typically, the longer your loan’s repayment term, the lower your monthly costs. For instance, if you’ve already been paying your 30-year mortgage for 5 years and you refinance to another 30-year term, then you’ll hit reset and have 5 additional years to pay back your loan.
The plus side is that this could help you reduce monthly housing expenses — and give you access to a lump sum of money all at once.
Cash to pursue life goals
After closing on your cash out refinance, you’ll receive a pretty significant chunk of change in your bank account. Depending on your home equity, this can be anywhere from a few thousand dollars to tens of thousands.
You can use that money any way you see fit to pursue your goals. For instance, it could help you start a business, buy an investment property or vacation home, or fund college tuition.
You could also use that money to reinvest into your home by making any desired upgrades. Not only can renovations improve the look and usability of your space, but they could also boost your equity again.
Get rid of higher interest debt
Home loan interest rates are relatively lowcompared to other types of loans and debt, such as credit cards, personal loans, or student loans. Therefore, using the money from your cash out refinance to pay for these bills can save you significant interest charges over the long run.
Possible tax deductions
In some cases, a cash out refinance could lead to tax savings. For example, you might be able to write off interest for the balance you cash out, if you use the money for renovations that will increase your home's value.
These upgrades, known as capital improvements, may include:
- A new roof
- Swimming pool
- New bedroom or bathroom addition
- Central air or heating system install
- New storm windows
The IRS provides more details on this deduction. But if you have any questions about how a cash out refinance may impact your taxes, then it’s best to consult with a tax professional.
Cons of a cash out refinance
Here are a few potential drawbacks of a cash out refinance:
Potentially higher interest rate
When you swap out your old mortgage for a new home loan, you could end up with a higher interest rate, depending on the current market environment. That means a cash out refinance might increase your borrowing costs in addition to your larger loan amount.
A longer term means more interest over time
While a longer repayment term can create some wiggle room in the monthly budget, it comes at a price. You could pay more in interest over the life of your loan.
Possibly larger monthly payment
With a cash out refinance, you’ll borrow more than what you owe on your initial mortgage, so you can receive money after closing. That means, depending on your interest rate and loan term, you could have a larger monthly payment than before.
If that’s the case, you’ll want to confirm your budget can handle the increased cost.
Just like when you first got your mortgage, you’ll have to pay closing costs for your refinance. Closing costs can add up to thousands of dollars, which you may either roll into your loan or pay upfront.
A mortgage — whether for a purchase or refinance — is a secured loan, and your home is the collateral. Therefore, if you fall behind on payments after a cash out refinance, you could potentially lose your house to foreclosure.
Why you should cash out with Better Mortgage
Whether you want to put in a pool, buy a vacation home, or pay off debt, a cash out refinance can be a powerful tool to give you the money you need to get started on your goals.
Better Mortgage, makes the process as smooth as possible — and helps you avoid unnecessary lending fees. Here’s what you can expect when you refinance with us:
- We’ll get you pre-approved in minutes — and to the closing table in just over a month (on average).
- We make the application process simple. Our entire loan process is completed online, so you can upload documents and track your application’s progress anytime, anywhere.
- You won’t pay a dime in lender fees. That’s right — unlike some other lenders, we don’t charge you to underwrite or originate your loan.
- Our loan officers don’t work on commission, so you’ll never have to worry about getting pressured to take on a bigger mortgage than you need.
Ready to see how a cash out refinance can help you reach your goals? Get pre-approved today.
Better Mortgage Corporation. NMLS #330511