Cash-Out Refinance: The Pros and Cons
January 16, 2021
What Is It?
A cash-out refinance replaces your current mortgage for a new one with a principal that is higher than the amount you owe, which allows you to keep the difference in cash. You may also be able to lower your interest rate or adjust the length of your loan term, but the primary purpose of a cash-out refi is to use your home equity to get cash in hand.
The Pros
- Immediate cash in hand: A cash-out refi’s main benefit is that it converts your home equity into liquid assets. You can therefore use the money you have available to fund any number of investments, whether it is home renovations or medical expenses. If you plan out how to use the equity in a responsible way, you can increase the value of your home and build equity in the long run.
- Consolidation of debt: Many borrowers use a cash-out refinance to combine all their high-interest loans, such as student loans and credit card debt, they carry in other places into a single mortgage. This helps to manage finances with a single monthly payment, and mortgages traditionally have lower interest rates compared to other personal loans. Keep in mind, however, that your house will become collateral.
- Tax credits: When used for home improvements, the interest on a cash-out refinance is tax deductible. If used any other way, the interest is tax-deductible up to $50,000 for an individual or $100,000 for a couple. You always should check with your tax advisor for current deductibility and updated laws.
- Higher interest rates: Cash-out refinances are always riskier than other types of refinances because you are borrowing more than what you already owe on the house. And with greater risk comes a higher interest rate.
- Extra costs: Like any other refinance, a cash-out refi requires the borrower to pay closing costs. There is also a second appraisal required for this option, which is a cost you will need to take on. Additionally, borrowers need to pay interest on the extra cash that comes with such a refinance, adding to the cost of the loan.
- Higher risk: The more equity you liquidate in your home, the more risk you take on if the property values decrease. Depending on what you need cash for, it might not be the best idea to drain the equity you have built on your house.
If you decide to go ahead with a cash-out refinance, the amount of additional cash you can borrow will vary based on several factors. The amount of money that you can borrow depends on the amount of equity that has been built up in the home's value. For example, to be eligible for an FHA cash-out refinance, borrowers will need at least 20 percent equity in the property based on a new appraisal.
If you have immediate and important expenses coming up, it may be worth looking into using some of the equity in your home. Talk to your loan officer to see of a cash-out refinance is the right step for you.
------------------------------
RELATED VIDEOS:
Obama Mortgage Is the Home Affordable Program
Principal Payments and Your FHA Loan
Living in a Single Family Home
FHA Loan Articles
June 15, 2023When you buy a home with an FHA mortgage, cash for closing costs and your down payment is required. It would be easy to assume you simply give the lender cash in the specified amount and that’s the end of the story.
May 20, 2023Did you know there is an FHA loan option that lets you build a house from the ground up? You can use this mortgage to build on land you own or on land you buy as part of the loan. But you will want to address some issues comparing construction loan options.
May 3, 2023Sometimes when buying a home there may be a question of surplus or excess land. You likely won’t face this issue when buying a condo unit, but for other types of purchases, this may be an important factor in the appraisal process.
April 18, 2023Your lender is required to make sure you can realistically afford your mortgage, and that means verifying that your income is stable, reliable, and will continue after your mortgage has closed. What some don’t realize about this process is that there are standards for verifying income.
April 1, 2023FHA loan rules for single family purchase loans include guidelines for the lender to use if the applicant has rental income. Some want to know whether it is possible to qualify for an FHA mortgage using rental income. The real issue is whether the rental income meets FHA loan rules.
