One of the best things you can do for your budget is refinance your home, if you are in a position to do so. In many cases, refinancing to a lower interest rate can ease cash flow each month, while at the same time-saving you thousands of dollars over the life of your loan. Refinancing allows you to “sweat the big stuff” to free up a little more available cash each month.
However, not all refinancing options are created equal. A type of refinancing to watch out for is cash-out refinancing. There are some reasons to get a cash-out refinance, but before you take the plunge, it’s important to understand the pros and cons of a cash-out refinance.
What is a cash-out refinance?
A cash-out refinance is a transaction in which you refinance your home for more that you owe on your mortgage. If you have enough equity in your home, so that it is worth substantially more than you owe, you might be able to get a bigger loan, and then keep the difference. So, if your home is worth $150,000, and you owe $90,000 on it, you could refinance for $110,000 and pocket the $20,000 difference between what you owe and what you’ve borrowed.
Advantages and disadvantages of a cash-out refinance
The biggest advantage of a cash-out refinance is that you are able to get cash. It’s one of the ways that you can transform the liquid equity in your home into liquidity. On the downside, though, it also means that you might end up repaying more than you would originally have paid. On top of that, you might end up paying a higher interest rate for a cash-out refinance.
You should also consider what you plan to use your cash-out refinance for. Many consumers use the cash-out refinance as a way to pay off credit card debt. In those cases, you run the risk of taking your unsecured debt and securing it with your biggest asset. If you run into trouble paying your mortgage, you could end up losing your home because of the credit card debt you secured with your cash-out refinance.
In some cases, if you have equity in your home and you want to use it as a tax-deductible (the loan interest often comes with a tax break) source of capital, it might make more sense to get a home equity line of credit, depending on the interest rate you can get and the fees involved. A site like Quizzle can help you determine what loan deals are available to you, depending on your credit situation.
In the end, though, you are probably better off avoiding the issue of a cash-out refinance altogether. If you can refinance to a lower rate and payment — and especially if you can refinance to a lower term — you can probably pay off your home soon, and save more money, if you avoid a cash-out refinance.
Quizzle has teamed up with our friends at Quicken Loans to show you a list of mortgage refinancing options so you can choose what fits your personal goals and lifestyle.