The Pros and Cons of Cash Out Refinancing

If you are considering a refinance of your mortgage loan, you may have the option to take out some cash at the same time, with cash out refinancing. You can utilize your built-up home equity and apply that toward other high-interest debts or home improvement investments. Not only will you be refinancing your mortgage at today’s lower interest rates. You will be getting cash back to take care of other financial needs or goals.

As with any loan, there are some pros and cons that you need to understand before pursuing a cash out refinance. This solution is not ideal for every homeowner.

Here Are the Key Advantages and Disadvantages of Cash Out Refinancing

cash out refinancing

Pro: Getting the Cash You Need Now

A cash out refinance makes a lot of sense if you are able to put the money to work for you. You have built up a healthy amount of equity in your property, so why not utilize it for other important purposes? You can invest in home improvements, renovations and upgrades. This could help grow your equity even more as you increase the potential resale value of your house. Or, you may want to pay off other high-interest debts such as student loans, car loans and credit cards. The cash out refinance will give you a better interest rate on any money you take out, so you can save money by reducing other debts or taking care of emergency expenses.

Be Mindful of How Much to Take Out With Cash Out Refinancing

Con: Taking Out More Than You Need

A cash out refinance is only wise if you really need the money. If not, you should pursue a standard home refinance to reduce monthly mortgage payments or shorten the length of the loan with a lower fixed interest rate. Any cash you take out will essentially be a second mortgage, adding more principal to your total loan amount. If you don’t need the money now, then it’s better to keep the equity in your property. You might be able to access it later with a home equity line of credit (HELOC) or simply maximize your profit when you eventually sell the property. Never take out more cash than you actually need and don’t get a cash out refinance if the money isn’t going toward something worthwhile.

Cash Out Refinancing Lets You Take Advantage of Lower Mortgage Rates

Pro: Refinancing at a Lower Mortgage Rate

The primary benefit of any mortgage refinance is to take advantage of lower interest rates. Many homeowners are in better financial standings now than when they first bought their houses. This, in addition to the home equity that can be leveraged, allows the borrower to qualify at a lower rate. Today’s mortgage rates are still at historic lows, so it is a great time to refinance. You may be able to reduce your monthly mortgage payments, decrease the remaining total interest to be paid, shorten the time it takes to pay off your mortgage and/or take cash out to use for other financial needs.

Will Cash Out Refinancing Benefit You in The Long Run?

Con: Starting a New Loan

It’s always important to understand how a mortgage refinance works. Whether or not it benefits you in the long run may depend on a number of factors. If you are refinancing your 30-year fixed-rate loan with another 30-year loan, then you are basically starting over. You are probably going to reduce your monthly payments significantly, but you are beginning a new 30-year term. This may or may not be the best option, depending on where you are at with your current mortgage loan and principal amount. Refinancing to a shorter term (for example, a 10- or 15-year loan) may be more beneficial if the monthly payments are affordable. Or, in the case of cash out refinancing, you can utilize the funds to pay off other high-interest debts, cover medical/education expenses or invest in home improvements.

Cash Out Refinancing Can Allow You to Take Care of Emergency Expenses

Pro: Short-Term Financial Benefits

On the positive side of a cash out refinance, you should benefit from the cash in hand that you can use for other purposes. Paying down credit card debts or paying off car loans could help improve your credit score significantly. Taking care of emergency expenses or home repairs might force your hand to take cash out when refinancing your mortgage loan. You can use your equity now, when you need it most.

Know The Long-Term Drawbacks With Cash Out Refinancing

Con: Potential Long-Term Drawbacks

By taking out some or all of your cash equity now, you are losing value later if you sell your property before your mortgage loan is fully paid off. Cash out refinancing may not be the best option you are planning to sell in the next couple years. It may be worthwhile if you are investing back into the value of your property and/or selling many years from now. That gives you time to pay down the amount and grow more equity to offset what you take out. Avoid cash out refinancing if you are planning to use the money to cover your mortgage payments. If you are in a state of financial distress, a cash out refinance will likely only exacerbate your problems. Look into other refinancing or selling options if you are having trouble keeping up with mortgage payments, property taxes or homeownership expenses.

Get In Touch Today to Find Out More

These are a few of the pros and cons of cash out refinancing. To learn if a cash out refinance is right for you and to see if you qualify for a lower mortgage rate with today’s great rates, contact us today. Let us help you make the best decision for your situation when it comes to your cash out refinance.