Pros And Cons Of A Cash-Out Refinance
Nearly
every homeowner in the world has debt. With so many of life's
big purchases impossible to obtain without credit, people
have become accustomed to owing money. Unfortunately, it's
very easy to become burdened by debt. Credit card balances,
student loans, household projects...all of these things
can snowball into a big problem if they aren't handled carefully.
With a cash-out refinancing program, homeowners can refinance
their existing mortgage and get cash back to help pay
off these debts.
Here's how it works: With a cash-out refinance, you refinance
your mortgage for more than you currently owe and pocket
the difference. For example, say you owe $100,000 on a $150,000
home and you want $10,000 to pay off other debts. You can
refinance for $110,000 and walk away with a $10,000 check.
Like with any mortgage program, there are certain benefits
and drawbacks, and a cash-out refinance is not for everyone.
Take a look at these pros and cons of a cash-out refinance,
then talk to your mortgage consultant and tax professional
about whether or not it's a good option for you:
Potential Benefits of Cash-Out Refinancing
1. More cash
A cash-out refinance can improve your regular cash flow
by paying off your high interest revolving debts. With this
program, you will still carry the debt, but instead of paying
several bills, you will fewer (or only one, depending on
how many debts you are consolidating). Some homeowners also
use the extra cash to start
a savings or emergency fund.
2. Tax benefits
When you roll your higher-interest debt into a mortgage
payment, you stand to gain significant tax benefits since
all or some of the interest in a mortgage may be tax-deductible.
3. Improved credit and better interest rates
Normally, cash-out refinance programs carry lower interest
rates than other loans like home quity loans or business
loans. If you need a little cash to fix up your house or
start a small business, a cash-out refinance might be a
good option.
Additionally, by wrapping your debt into a lower-interest
loan and paying it down or off, you can improve your credit
ranking.
Drawbacks to Cash Out Refinancing
1. Upfront Costs
It's not unusual for borrowers to pay hundreds or even thousands
of dollars in closing costs and fees. If you have a great
credit score or a decent amount of equity, these costs could
be a lot less. It all depends on your personal situation.
These mortgage closing costs are typically taken out of
the amount of cash out are trying to obtain.
2. Extended time for paying off mortgage
By refinancing, you're resetting the payment clock and extending
the period of time you'll owe on your home. While this might
not bother some homeowners, others may shudder at the thought
of having mortgage debt for another 15-30 years. Your loan's
amortization
schedule will also likely start over again making more
of your monthly payment be paid towards interest.
3. Risk
By extending the loan terms and increasing the amount you
owe to the bank, you are putting yourself at a greater risk
if anything unfortunate should happen. If you were to lose
your job or become seriously ill or injured, you may be
unable to make your mortgage payments - which could lead
to foreclosure. This is why it is important to handle your
debts carefully and have an emergency fund available.
To learn more about cash-out refinancing, talk to a trusted
mortgage expert in your area.
Please note that we are not licensed mortgage
or tax professionals and the information contained on this
page is simply the opinion of the writer.
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