Learn if Cash-Out Refinance Is Worth It?

Make improvements or repairs to your home — Using the funds to rebuild or enlarge a portion of your home or for needed repairs could pay for itself by increasing the value of your home. However, don’t expect a cash-out refi to provide a speedy remedy during a house emergency — the renovation process could take months.

 

The disadvantages of a cash-out refinance

While there may be numerous reasons why you want a cash-out refi, it may not always be a good idea. This is why.

You may end up paying a higher interest rate. Refinancing alters the terms of your mortgage, which may include your interest rate, and you may end up with a higher mortgage rate. Consider whether the loss of the flow rate is worth the convenience of having access to cash.

Closing costs must be paid. Cash-out refinances, like other types of mortgage refinances, necessitate the payment of closing expenses. The costs can vary based on the sum of your new loan, and they can add up to hundreds or thousands of dollars. As a result, spending $2,000 on closing fees may not make sense to cash out $5,000.

Your monthly payment may be increased. Because you’re taking out a new mortgage for a larger amount than your existing one, your monthly payment may be higher depending on your chosen term and the rate you qualify for. Make sure your new payments fit comfortably into your budget, so you don’t fall behind on your mortgage payments.

 

Which is more advantageous: a cash-out refinance or a home equity loan?

If refinancing does not result in a reduced interest rate, you may seek a home equity line of credit (HELOC) or home equity loan (HEL). These are commonly referred to as second mortgages, but they will not replace your mortgage or affect the conditions of your mortgage.

A home equity loan pays you in one lump payment and uses your home as collateral. A HELOC likewise uses your property as collateral, but you can borrow money as needed until the line of credit is exhausted, or the draw term expires (often 10 years later).

While the interest rate on a home equity loan or HELOC may be greater than the rate on a cash-out refi, you will keep your current mortgage rate and may not have to spend as much in closing costs. It would help if you did the math to determine which choice is best for you.

Steps to follow

If you believe a cash-out refinance is a good option for you, compare mortgage lenders. If you’re looking for a mortgage, there’s a time when several credit queries are only counted as one for your credit scores. You normally have 14 days, though this may vary depending on the scoring scheme.

Here are some questions to consider.

  • What are the lender’s closing costs?
  • Will you require an in-person evaluation?
  • How much of your equity will the lender allow you to access?
  • What is your new interest rate going to be?
  • After closing costs, what is your “break-even” point?
  • Has your credit improved since you obtained your first mortgage?
  • Is a home equity loan or HELOC better suited to your financial objectives?