Have
you thought of refinancing? The option is becoming more of a
possibility for many borrowers as housing values across the country
continue to increase. The real question is whether homeowners should
follow through with the cash out refinancing option.
A
cash-out refinance means you refinance your mortgage for more than
the current outstanding balance and keep the difference between the
old and new loans. For instance, you want $25,000 to start a
business. But you still owe $100,000 on a $200,000 house. You can
refinance the mortgage at $125,000 and use the $25,000 in equity you
pulled out for your business venture. Depending on the rate you
started with, you could end up with a lower rate and a lower payment
on the new mortgage, too.
Here are some Pros of Cash-Out Refinances:
— Satisfy big expenses: A cash-out refi is a way to access money to pay off big bills such as college tuition, medical expenses, new business funding or home improvements. It often comes at a more attractive interest rate than those on unsecured personal loans, student loans or credit cards.
— Improve your debt profile: Using a refinance to reduce or consolidate credit card debt is also considered a cash-out refinance and is a popular option.
— More stable rate: Many of borrowers choose to do a cash-out refinance for home improvement projects because they want a steady interest rate instead of an adjustable rate that comes with home equity lines of credit, or HELOCs.
Here are Cons of Cash-Out Refinances
— Worse terms: While you may get a lower interest rate than your current mortgage, your cash-out refi rate will be higher than a regular refinance at market rate. Even with a credit score is 800, you will pay a little more, usually an eighth of a percentage point higher, than the market rate on a regular loan.
— Cumbersome, and sometimes pricey, process: Gathering many of the same documents you did when you first got your home loan: past two years of tax returns; past two years of W-2 forms; 30 days’ worth of pay stubs; two most recent bank statements; and possibly more, depending on your situation.
— You’ll also have to pay closing costs at the end of the refinance, which can range from hundreds of dollars to thousands of dollars, depending on a variety of factors.
— Home at greater risk: Taking out equity puts you at greater risk of owing more than your home is worth when housing values go down.
So, is it for you?
Here are some Pros of Cash-Out Refinances:
— Satisfy big expenses: A cash-out refi is a way to access money to pay off big bills such as college tuition, medical expenses, new business funding or home improvements. It often comes at a more attractive interest rate than those on unsecured personal loans, student loans or credit cards.
— Improve your debt profile: Using a refinance to reduce or consolidate credit card debt is also considered a cash-out refinance and is a popular option.
— More stable rate: Many of borrowers choose to do a cash-out refinance for home improvement projects because they want a steady interest rate instead of an adjustable rate that comes with home equity lines of credit, or HELOCs.
Here are Cons of Cash-Out Refinances
— Worse terms: While you may get a lower interest rate than your current mortgage, your cash-out refi rate will be higher than a regular refinance at market rate. Even with a credit score is 800, you will pay a little more, usually an eighth of a percentage point higher, than the market rate on a regular loan.
— Cumbersome, and sometimes pricey, process: Gathering many of the same documents you did when you first got your home loan: past two years of tax returns; past two years of W-2 forms; 30 days’ worth of pay stubs; two most recent bank statements; and possibly more, depending on your situation.
— You’ll also have to pay closing costs at the end of the refinance, which can range from hundreds of dollars to thousands of dollars, depending on a variety of factors.
— Home at greater risk: Taking out equity puts you at greater risk of owing more than your home is worth when housing values go down.
So, is it for you?
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