Cash Out Mortgage Refinancing
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What Is Cash-Out Mortgage Refinancing?
A cash-out refinance replaces an existing mortgage with a new loan with a higher balance, sometimes with more favorable terms than the current loan. The difference between these two loans is provided to the homeowner as cash.
A cash-out refinance differs from a traditional mortgage refinancing, which simply replaces your current loan with a new loan that has a new set of terms and, in many cases, a lower interest rate.
A cash-out refinance also differs from a home equity line of credit (HELOC), which allows you to borrow cash using the home equity as collateral. HELOCs function as a second mortgage, with the borrower withdrawing and repaying funds on a more flexible schedule, and the government allowing a tax deduction for interest payments. Unlike traditional first or second mortgages, a HELOC interest rate is not fixed; the rate varies from month to month with the prime rate.
Cash-Out Mortgage Refinancing Advantages
Use your home equity to pay for improvements that will increase the property value of your home.
Take advantage of the potential tax-deduction benefit associated with the interest paid on a mortgage loan.
Pay off high-interest and/or high-balance credit cards or eliminate other high interest debts to save money.
Pay for unforeseen expenses, such as emergency medical bills or costly car repairs.
Helping to pay for college tuition.
Cash-Out Mortgage Refinancing Disadvantages
Interest Costs: You’ll restart the clock on all of your housing debt, so you’ll increase your lifetime interest costs (borrowing more also does that).
Foreclosure risk: Because your home is the collateral for any kind of mortgage, you risk losing it if you can’t make the payments.
Closing costs: You’ll pay closing costs for a cash-out refinance, as you would with any refinance. Closing costs are typically 2% to 5% of the mortgage - that’s $4,000 to $10,000 for a $200,000 loan. Make sure your potential savings are worth the cost.
Enabling bad habits: Using a cash-out refinance to pay off your credit cards can backfire if you run up your credit card balances again.
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