If you have been looking for ways to leverage your property equity, you may have come across cash out refinance. But is it worth considering?
Cash out refinancing allows you to secure a new mortgage for more than you owe on your current one, and then keep the difference. The amount you may be eligible for boils down to how much equity you have in your property.
One of the best things about cash-out refinancing is that you can use the money for anything. However, it is not always the best option. In this read, we’re going to look at how cash-out refinance works, and the pros and cons, with the aim of helping you make an informed decision.
A cash-out refi occurs when you replace an existing home loan by refinancing with a new, bigger loan. When you borrow more than you currently owe, the lender gives you the difference in cash, which you can then use for any pressing matter.
Cash Out Refinance Pros
If you have accumulated equity in your property, it makes sense that you would like to tap into it to meet another financial goal. There are several situations you may want to consider cash-out refinancing including:
1. Higher-Interest Debts Consolidation
One great use of a cash-out refinance is consolidating high-interest debts like personal loans and credit card debt. There is also a possible tax benefit as home loan interest may be tax-deductible, while this is not the case for car loans, credit cards, and personal loans. However, ensure you check the total financial costs in addition to the interest rate.
2. Home Repairs or Improvements
Taking a cash-out refi to remodel or expand part of your house could pay for itself by increasing the value of the property. However, do not rely on cash-out refinancing for a quick fix during an emergency.
3. Pay for Higher Education
If you have a loved one about to get into college, you could use a cash-out refinance instead of taking a private student loan, which is likely to have a higher interest rate.
Cash Out Refinance Cons
While there are numerous reasons to opt for cash-out refinancing, it does come with its fair share of downsides. Here are some situations a cash-out refinance does not make sense:
1. You May End Up With a Higher Interest Rate
Cash out refinance changes your home loan terms, which include the interest rate. This means you may end up with a higher mortgage rate.
2. Monthly Payments May Increase
Depending on the rate and term you qualify for, your monthly payments may end up being higher are you are securing a new loan for a larger amount than the existing one. As such, it is important to ensure that your new monthly payments comfortably fit into your budget to avoid issues down the line.
Cash out refinancing comes with both pros and cons and it’s your job to weigh them and decide whether it is the right option for you.