If you’ve been looking into home refinancing options, you’ve probably run across the term “cash-out refinance.” You may be wondering what this is. How is it different from a regular refinance? What are the potential risks and rewards? Read on to find out more about cash-out refinance, what it’s used for, its benefits, and the risks it could bring.
What Is a Cash-Out Refinance?
A refinance is a type of home loan where you replace your existing loan with a new loan, often with a better interest rate, smaller monthly payments, or different terms. A cash-out refinance takes this one step further. Rather than replacing your existing home loan dollar for dollar, you borrow against some of the equity you’ve built up as well and take out a larger loan. Once you repay the old home loan with the money from the new loan, the remaining balance is yours in cash.
Since you already own your home, obtaining a cash-out refinance is often much faster than the typical mortgage process, taking a couple of weeks instead of months. Your lender will verify the details of your home, order an appraisal, and complete the underwriting process. You’ll have money in hand before you know it. But what can you do with those funds?
What Is a Cash-Out Refinance Used For?
Typically, homeowners use a cash-out refinance to get cash for important expenses. For instance, some pay education fees, such as college tuition or student loans. If you need cash quickly to cover an emergency, a cash-out refinance can be a convenient way to access the money without taking out a high-interest personal loan or borrowing with a credit card. A cash-out refinance can also be used to consolidate debt, pay for a vacation, or as a down payment on a second home or investment property.
Often, the cash is used for home improvement projects, such as repairs or remodeling, many of which can improve the value of the home. These might be necessary tune-ups, such as preventing structural damage or finally tackling a problem. Or it can mean putting in the new kitchen or bathroom you’ve been dreaming of. You don’t have to go big, though. You can start by making cosmetic improvements. Add the fine details you’ve always wanted or take the first steps to get your home ready to sell in the future.
How you use a cash-out refinance is ultimately up to you.
What Are the Benefits of Cash-Out Refinance?
In addition to providing funding for projects and important expenses, a cash-out refinance could lower your interest rate and monthly payments. You could wind up saving money over time and even paying off your home faster. A cash-out refinance also gives you the opportunity to change the type of loan you have. You could switch from an adjustable-rate mortgage to a fixed one, for instance.
This type of refinancing opens up exciting possibilities, but you should also be aware of potential risks and take the time to decide if a cash-out refinance is appropriate for you.
What Are the Risks of a Cash-Out Refinance?
The number one risk of a cash-out refinance is that you are using your home as collateral. If you can’t keep up on your monthly payments, you could end up losing your home. Because you’re borrowing against your home, the lender is entitled to take it if you fail to repay your mortgage.
Changing your loan could mean lower interest rates and/or lower monthly payments, but it could also raise one or both of those. Higher monthly payments could add to the risk of falling behind or not being able to make payments at all. In this case, your home could eventually go into foreclosure.
Even if you do get lower interest rates or monthly payments, you could pay more in the long run. Especially if the new loan has a longer payment period. A cash-out refinance can mean starting a new 30-year mortgage. Lower rates or no, drawing it out like this can add up.
Make use of a refinance calculator to ensure you can make your future payments and get the best deal.
In addition to these risks, cash-out refinance can have some closing costs. Make sure you calculate these into your budget. You can also opt to work with a lender that offers cash-out refinancing with no closing costs, such as Solarity Credit Union. They’re no-closing-cost Express Refinancing is easy and saves the borrower money.
Risk of Going Underwater
You should also consider the risk of your home value going down. If that happens, you’d go underwater on the mortgage. Underwater basically means if the value goes down, you may no longer have enough home equity. You could owe more on your home than it’s worth. Being in this situation means you wouldn’t be able to sell or refinance the home.
How Do I Decide If a Cash-Out Refinance Is Worth the Risks?
Ultimately, you must choose whether the benefits of a cash-out refinance outweigh the risks in your current financial situation. Do your research, look at your budget, shop around for the best rates, and talk to your lender about your options. Planning ahead can lessen the risk and ensure your borrowing experience is a successful one.
If you’ve decided a cash-out refinance is right for you, consider working with Solarity Credit Union. Visit their refinance page and play with the handy refinance calculator or talk to one of their expert Home Loan Guides and start the journey to achieving your financial goals.
