A cash-out refinance is one of a few different ways you can refinance your home. It’s different from a standard refinance in that this option allows you to use your home’s equity to receive cash. That’s right, with a cash-out refinance you can receive some of your equity in cash, which you can then use however you like. Still, there are other options that may be better suited for you. How do you know?
When you work with Solarity Credit Union, a Home Loan Guide can help you to decide which type of home refinance or loan is best for your specific financial situation. A cash-out refinance could be an ideal choice or lead you in a different direction. A professional will help to assess your financial needs and weigh each option thoroughly.
To get you started, below is information to help you get a feel for what your options are. Here are a few of the pros and cons of a cash-out refinance so you can better decide if it’s the right move for you.
Access to liquid finances
It can be difficult to come up with a large amount of cash on your own all at once, and many people assume there are no ways to do so. Luckily, when you own a home, you have the option to do a cash-out refinance using your home equity. If you want to use a large amount of money to make a positive financial change in your life, this could be a great option for you.
With a cash-out refinance, you can use the money to complete the home improvements you’ve always wanted to make. Working on your home can be a costly endeavor, but using your home’s equity can prove a convenient way to get those jobs done. When this money is used toward projects that will increase the value of your home, a cash-out refinance can actually prove to be a great investment.
The funds from a cash-out refinance can be used for more than your home. If you’ve racked up significant debt due to student loans or credit cards, a cash-out refinance could be a good option for you. Credit card debt in particular usually comes with very high interest rates. The interest rate for your cash-out refinance will likely be much lower, so paying off your credit card debt and reducing the overall interest you’ll pay could be worth it.
Student loan debt can be similar. While interest rates aren’t usually as high as with credit card debt, the balance is often a staggering number and could be spread between multiple lenders. Consolidating your debt into one place could prove beneficial for your finances.
Lower monthly payments
When you choose to refinance your home, the terms of your loan will start over with your new loan. That means that, even if you were already 20 years into your 30-year repayment plan, you’ll start a new 30-year repayment schedule with your new financial institution. The longer repayment option could lower your monthly mortgage payment (depending on how much extra you borrow against your equity). It’s a great option for homeowners who would like to have a little more flexibility each month and a little extra cash in the moment.
Another new term option that borrowers get excited about is a lower interest rate. When you opt for a cash-out refinance, have the potential to secure a lower mortgage rate, which can save you some cash down the line. Just like when you’re shopping for a home loan, you should compare interest rates between refinancing options and lenders. Take advantage of repayment calculators, such as the one on Solarity’s website, to compare terms and interest rates.
Possibility of foreclosure
One of the cons of a cash-out refinance is that it has the potential to result in the loss of your home. This can be a big red flag for people who aren’t certain they’ll always be able to keep up with their monthly payments. When you decide to refinance with a cash-out refinance on your home, your home will be used as collateral. That means that, if, for some reason, you cannot pay your new mortgage in a timely manner, your house could go into foreclosure.
If you’re not willing to risk the ownership of your home or you’re not confident that you can make payments in a timely manner, then a cash-out refinance may not be the right option for you.
If choosing to do a cash-out refinance, you should consider the closing costs. When you refinance your home, lenders often charge fees for origination, appraisals and inspections. Much like when you initially purchased your home, you’ll be charged
closing costs that can amount to a few hundred to a few thousand dollars. Having to pay this extra money could make this loan process not as beneficial, depending on your situation.