A cash-out refinance can help a consumer pull money out of the equity that has built up in their home. It is essentially a new loan that replaces a current loan, and the difference between the two mortgages is where the money comes from. The number of funds a consumer can withdraw will be based on their credit score. It is said that most cash-out refi agreements allow 80% of the home’s equity to be withdrawn.
Some consumers use this cash-out as a way of remodeling their home, paying off other debts, or use it toward student loans. The point is, the money allows the consumer the freedom to use it however they choose. With this freedom, it is important that the consumer realize that the money is there to help them, not hinder their endeavors. A cash-out refi can allow you the chance to create the kind of home you’ve always wanted, so it must be used wisely. There are advantages to a cash-out refi, in addition to the ones listed above.
For example, a consumer can get their interest rate lowered when they add this loan on top of their current mortgage. As mentioned before, it allows for home remodeling and oftentimes, the consumer will use this cash-out to help alleviate their current financial problems, such as credit card debt, or student loan debt. One can even use it to put a loved one through college or invest the money for a rainy day.
These all seem like promising reasons for a cash-out, but there is always a cloud looming overhead, and in this case, it is the disadvantage of a cash-out refi. For example, when you add another loan on top of your current mortgage, your interest rates will become higher in the long run. That means you’ll be paying off the cash-out on top of the current loan. Something else to consider is this: you’ve consolidated your credit card debt, or paid off student loans, or added a new room to your home…. This will all have to be paid back over the next 30 years. You might like the end result of the cash-out, but imagine paying off your financial liabilities, in addition to your home loan, for 30 years? Suddenly, the cash-out refinance doesn’t sound so appetizing.
Something else to consider is once you apply for the cash-out refi, the money will not immediately become available, and an appraiser will determine how much you can take out. In addition, your loan terms may have to change in order for this modification to take place. Before engaging in this type of refi, investigate whether there are any closing costs, for this could definitely be a gamechanger in the end. Another disadvantage is the risk of losing your home if you’re unable to repay the cash-out, possibly resulting in foreclosure. It is wise for the consumer/homeowner to be wary of taking out too much cash for frivolous reasons. It should not be used for vacations, or large items, such as boats or other unnecessary items.
The more you take out, the more you will have to pay back, and 30 years is a long time. With all of this in mind, it is up to the consumer whether they want to get a cash-out refi, and the risks they’re willing to take to get it. The best plan would be to first meet with a lender to discuss this type of refi and determine if it’s the right thing to do. If the consumer is married or has a partner, this person should also meet with the lender, since this is a major life decision. Sometimes the easiest way to make a huge decision like this is to simply make a pros and cons list.
If anything, it will give you a better picture of what you will need to do to begin this process, what you’re willing and not willing to do, and it will allow you to take a step back and look at what you have to gain or possibly lose in the end.
The most important thing is for the consumer to understand the cash-out refi and determine whether it is even within their scope before making any hasty decisions. In the end, it is up to the consumer whether they want to take the responsibility of a cash-out to refinance and if they’re prepared to do the work that comes with it.