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Cash Out Refinance Pros and Cons

Cash Out Pros and Cons

The pros and cons of refinancing and taking cash out.

Evaluate the pros and cons of cash out refinancing to determine if it is the best solution for you.

If intend on taking cash out of your home you will want to closely look at the pros and cons.  If you will be using the funds to remodel your home, be sure to set realistic expectations of what will increase home equity and by how much.  Certain renovations will increase value more than others.

Pros of Cash Out Refinancing:

  • Paying off higher interest debt is one of the most beneficial reasons to cash out refinance.  You could end up saving thousands, or even tens of thousands overtime by switching from high interest loans and credit cards to a much lower rate of interest.  Mortgage rates are still very low allowing an excellent opportunity to save money by refinancing and consolidating debts.
  • Pay one monthly instead of several monthly payments which will simplify your finances and accounting.
  • Enjoy the tax benefits of writing off interest payments.  Mortgage interest is tax deductible whereas most other debts are not.
  • Use the money to invest or start a business.
  • Remodel your home.  Using your home equity to renovate your home inside and out.  Remodel kitchens and bathrooms, make an addition to your home, or even landscape your yard.
  • Set aside an emergency fund.  Tapping into your home equity at a low rate of interest in order to stash away some funds in the event of an emergency or simply to just have at your disposal may be an appealing option.  Do consider that you will be paying interest on such debts, but fortunately that interest is tax deductible.
  • Pay of student loans. For those who were not as fortunate to have parents use their home equity to pay for college may need to pay off encumbering students loans.
  • Enhance your lifestyle, travel, start a fun project, enjoy your life.

Cons of Cash Out Refinancing:

  • Extend the period of time you must pay on your home. If you still want to pay off your home faster than over the course of 30 years you may want to consider a shorter term such as a 15 year cash out refinance.
  • Loan fees.  Factor into your decision making process the loan fees that will be assessed and compare them in your total cost to total benefit ratio.  If you are paying off debt than the loan fees will likely be “washed out”.
  • Take into consideration the amount you are taking out will cost you more than the face value of the loan amount.  You will be paying interest on the loan amount which means you will be paying more than the amount of cash you receive.  While paying off high interest debt may save you money with lower interest rates, using the money for other reasons may be more costly than originally anticipated.  We can help you calculate the total amount you will be paying over time through principle and interest payments.
  • If you cash out to a loan-to-value that exceeds 80% you will be required to pay mortgage insurance which can be costly.
  • If your home is already paid off, taking cash out on a paid for home will introduce a new monthly liability that you are not currently paying.  Be sure that you are prepared for the long-term payments and interest that you will need to pay by starting a new loan.

 

 

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