Need extra cash and want to refinance your home? A cash-out refinance may be for you. This refinance is an alternative to a home equity loan in that a home equity loan is considered a second mortgage loan that is taken out alongside your existing first one.
Before using a cash-out refinance, understand what it is and what it means for you:
Cash-Out Refinances Gives You A Lump Sum
Cash-out refinances replace your existing mortgage with a new home loan for more than what you owe on your home. That difference is turned into cash and put in your pocket to use at your discretion. Some homeowners use this cash to make improvements to their homes, pay off debts, or put into savings.
There Will Be Higher Interest Rates & Monthly Payments
Because you are taking out a higher mortgage loan, you will have larger interest rates and monthly payments. Cash-out refinances are available through both fixed-rate and adjustable-rate mortgages. Work closely with your lender to research both options to determine which best fits your situation.
If you want to use a cash-out refinance, do it when interest rates are low and refinance when it most makes sense for you and your current financial situation. If you are close to paying off your mortgage, it is best not to refinance.
You Lose Equity In Your Home
Please be aware that when you use a cash-out refinance you will lose equity in your home as you are borrowing against the value of your home. If you take out too much equity, you will run the risk of going underwater.
To prevent this from occurring, most lenders prevent you from taking out no more than 80% of your home’s value. Before you consider using a cash-out refinance be sure that you have built up enough equity in your home. Otherwise, you will not be able to refinance.
Cash-Out Refinances Have Closing Costs
Because you are essentially taking out a whole new mortgage you will need to pay closing costs on your cash-out refinance. Closing costs will be similar to those of your original mortgage, so be sure to compare costs before you close to prevent overpaying.