Cash out refinancing allows you to refinance your home for more than it is worth and pocket the extra cash at closing. It is similar to taking out a second mortgage or home equity loan, with a few exceptions. When you get a home equity loan/second mortgage, you end up with two payments- your existing mortgage payment and the new loan payment. When you get a cash out refinance loan, you completely pay off your first mortgage and replace it with a new one.
Cash Out Refinancing Pros
For most people, homes are more than a place to live; they are an investment. This has become very clear given the number of homeowners who have taken advantage of cash out refinancing.
- Cash out refinancing can provide you with a lump sum of money that can be used however you see fit.
- In most cases, cash out refinancing is easy to qualify for because you can use the home as collateral, as long as you owe less than it is worth.
- There may be significant tax benefits to cash out refinancing if the loan is used to pay off other debt on which the interest is not tax deductible.
- If you use the money to pay off high interest debt, cash out refinancing can be a win-win situation.
- Interest rates can be lower on cash out refinance loans than they are on home equity loans.
Cash Out Cons
If you are thinking about joining the crowd and borrowing on the equity in your home, there are a few cash out refinancing cons that you will want to consider before signing on the dotted line.
- When you take advantage of cash out refinancing, you may be required to pay hundreds, or even thousands, in upfront closing costs.
- Cash out refinancing may not be in your best interest financially if you can't get a lower interest rate.
- If you borrow more than 80 percent of the value of your home, you may be required to pay costly private mortgage insurance.
- If your home loses value, you could find yourself in financial trouble if you ever decide to sell.
- If you default on the loan, you could lose your home entirely.
Before choosing to take the plunge, be sure to examine cash out refinancing pros and cons to determine whether it is the best option for your financial situation and home ownership needs. Ultimately, it will depend on your situation and what you plan to do with the extra cash. If you plan to splurge on a vacation or luxury item, and then lose your job later, you may own too much against your home and end up homeless. However, if you have high interest debt in credit cards, taking some cash out of your home equity could help you pay those off faster and get financially ahead. Weigh the benefits and the costs in your situation to decide what is best for you.