What is cash-out refinancing and how can it be beneficial to a mortgager? As the name implies, this refinancing occurs whenever a new, larger mortgage is issued to replace an existing one and the lender receives the difference as a cash payment.
It is somewhat similar to a home-equity loan but a home equity loan is a different loan from the existing loan. With cash-out refinancing, you still only have one loan, not two. But what are the advantages and the disadvantages of this type of refinancing?
The Advantages of Cash-Out Refinancing
Cash-out Refinancing has at least two advantages. Firstly, the mortgager is usually able to obtain a refinancing loan at a lower rate of interest than on a home equity loan or than taking out an unsecured loan to cover the cash needs. Even a small difference in interest rate can make a big difference in overall interest payments. And with cash-out refinancing, only one loan is maintained making it easier to manage.
Secondly, you will have cash on hand for whatever reason you intend to use it on whether it be home improvement, paying important bills, or even for personal use. Using the money on your home can increase the home’s value. On the other hand, this type of refinancing also has some drawbacks.
The Disadvantages of Cash-Out Refinancing
As with most refinancing options, cash-out refinancing means that your debt load is increased by the amount of cash taken out. Also, in some instances the refinance terms are worse than before. If this is the case, taking a cash-out refinance may not be the best option as it negates the benefits of refinancing in the first place. This will lead you to paying the interest on the cash on top of the original loan.
When taking a cash-out refinance loan, you should also be aware that the home is being placed at greater risk and there is a possibility that it could be lost if the borrower comes upon unfavorable circumstances and is unable to pay the loan back.
In the final analysis, the pros and cons of cash-out refinancing should be carefully considered before entering into a binding agreement. A good idea is usually to check first how much you are qualified with the HARP program to potentially assist you in any further payments. Ideally after some thoughtful consideration, the pros should outweigh the cons.
Ask a Mortgage Assistant for more help today! We look forward to sharing with you all of the refinancing options you may be eligible for.