A cash-out refinance allows you to replace your current mortgage with a larger one and receive funds for the difference between the two. You can use the funds you receive however you want, including paying off student loans, funding education for yourself or your children, or improving your home. However, it can be challenging to decide when this type of refinancing will most benefit you. Below are some factors you should consider before moving forward with a refinance.
1. Current Refinance Rates
One of the most important things to consider is current cash out refinance rates, as you will want to make sure that the decision to refinance will be worth it in the long run. Choosing to refinance can increase your interest rate and cause your monthly payments to grow, so making sure that you are getting the best possible rate will help you guarantee that these additional costs are worth it to you.
2. Your Needs
Lenders will often allow you to borrow up to 80% of your home’s value when you do a cash-out refinance, but the more you borrow, the higher your long-term costs may be. While you may be tempted to take out the highest amount possible, it is vital to understand precisely what you want to do with your money and the associated costs. Once you have a good idea of the amount you need, it will be easier to avoid potential issues that may arise from borrowing too much at one time.
3. Pros of Refinancing
There are many reasons that utilizing a cash-out refinance may benefit you. There are a few examples below, but you should also take the time to create a list for yourself.
- Investing in higher education – A cash-out refinance may be an excellent alternative to private student loans, which often have much higher interest rates. This allows you to invest in the future, either by funding your own education or supporting a college-age child, without experiencing a substantial increase in your debt.
- Consolidating high-interest debts – Using the funds you receive from a refinance can allow you to reduce high-interest debt by allowing you to pay off personal loans or credit cards. You may even be able to utilize a tax benefit because mortgage interest is sometimes tax-deductible, but interest on credit cards, auto loans, and personal loans is not.
- Covering home improvements or repairs – Rather than defer critical maintenance and risk the chances of causing further damage to your home, using funds from a cash-out refinance can ensure that your home is in the best possible condition for many years to come. You can also fund necessary upgrades or improvements.
4. Cons of Refinancing
You will also want to consider the potential cons of refinancing your home before making a formal decision. Some examples are below, but you should also meet with your mortgage advisor to ensure you get the complete picture.
- Closing costs – Cash-out refinances will require you to pay closing costs; these costs will vary depending on the new loan’s balance, and you could potentially be asked to pay up to thousands of dollars. If you need to spend a large amount of the money you are withdrawing on closing costs, this type of refinancing may not make sense.
- Interest rates may increase – Refinancing your mortgage will change the terms so that you could wind up with a higher mortgage rate. You will always want to consider if the access to funds will be worth potentially losing a lower rate.
- Monthly payments can increase – Depending on the rate you qualify for and the term you elect to go with, your monthly payments may be higher than your current rates because you are taking out a new mortgage for a larger amount than your existing one. It will be vital to ensure that your new payments fit into your budget before you move forward with a refinance.