What is a Cash-out refinance? Imagine you have a mortgage of 200k and you haven’t paid 50k. With cash-out refinancing, you can refinance for more than you owe and get a refund as well as a lower interest rate. What we mean is, if you still owe 50k and you refinance it for 70k, you get a refund of 20k to spend and enjoy a lower interest rate on the mortgage than was previously charged.
Simply put, a cash-out refinancing is when an individual acquires a new loan to trade with the current mortgage. People usually do this to enjoy a better interest rate on the mortgage. It can be helpful in some situations while in others, one is better off without it.
Cash-out refinancing, however, is not to be mistaken with a home equity loan. A home equity loan is a separate loan from your mortgage. In most cases, it attracts a higher interest rate than cash-out refinancing. The other difference is that you pay a closing cost after refinancing your mortgage but on a home equity loan, this is not done. See examples of home equity loans here:
Everything comes with its merits and demerits. Some may consider cash-out refinancing a good option while others may view it as a bad option. If you are undecided, we will give you some pros and cons of cash-out refinancing for you to compare and contrast. In the end, you will be able to determine if they are for you or not.
Some advantages of cash-out financing.
With cash-out financing, you get more stable rates. Unlike other loans, such as home equity loans where interest rates can be adjusted at any time, cash-out financing is stable. People prefer this option because they are assured that as long as they pay in time, the rates will remain the same. This gives people a peace of mind as they won’t worry about having to pay more than they owe.
Other than the rates being stable, they are also relatively low. Like we said earlier, the interest rates of cash-out refinancing are usually lower than other loans. This means you can get more money at a lower cost. You also get a lot of money to cover expenses that need more money like school fees without considering student loans. Student loans usually have a high-interest rate compared to cash-out refinancing.
It also improves your debt profile. A bank can decide to convert a loan into a mortgage so that you can pay at a lower interest rate. This is great because you now pay less to borrow the same amount of financing. This is done through cash-out refinancing as well.
Some disadvantages of cash-out refinancing.
It puts your home at a greater risk. When you take a cash-out refinance, you are at a risk of owing more than your home is worth. This can happen whenever housing value goes down. Default rates on cash-out refinancing were seen to be higher than those on regular refinances according to federal sources.
Cash-out refinancing also contains some undesirable terms. People are often enticed by the lower interest rates without being notified of the other costs involved. Cash out refinancing rates are always higher than normal refinance at the marketplace. People fail to see this fact.
Acquiring a cash-out refinancing can be a long and expensive process. The process is almost similar to the first time you acquired the mortgage. You will need all those documents you use to get a loan. It will also cost you money since you will be expected to pay a closing cost. The closing cost’s amount can vary from one situation to another. It can run from hundreds to thousands of dollars since its value is determined solely by the lender.
Cash-out refinancing is not for everyone. While it could save your life in some cases, it can completely ruin it when the situation changes. The best way to make a wise decision is to do your research on it before you consider it. Check the current rates on cash-out refinancing to evaluate whether the terms are within your capabilities.
With this guideline, we hope that you are now more knowledgeable of what cash-out refinancing is and how it affects you as the borrower. We also hope that the knowledge will help you to invest wisely.