For many homeowners, building equity feels like a long and tiring process. It’s a payoff that can take years and requires a lot of patience and discipline. But what if you could tap into and make use of your current home equity?
That’s exactly what a cash-out refinance allows you to do. When you’re still in the process of paying off your mortgage and the terms start feeling a little too demanding, you can take a new and better mortgage over it.
But with the pros of anything comes its cons. Let’s break them down so you can decide if it fits your financial goals.
What Is a Cash-Out Refinance?
A cash-out refinance acts as a replacement for your current mortgage. It essentially replaces the mortgage with a newer one that’s larger than what you currently owe. So, you get to take the extra with you in cash.
For instance, you apply for and receive the refinance at 80% of your home’s current value. It pays off your mortgage while the rest of the amount is lent to you for your preferred use.
The equity that you’ve built in your home becomes liquid, and that cash can be used however you choose, including for:
- Home upgrades
- Debt consolidation
- Education fees
- Startup investment
The Pros
A cash-out refinance is a popular and much more preferred financial move for homeowners because of these factors:
Access to a Large Sum of Cash
A cash-out refinance gives you instant cash to your desired amount, which primarily depends on how much equity you’ve built up. Most lenders offer 80% of this value, for which you can apply easily online on platforms like AmeriSave.
Lower Interest Rates
Mortgage rates are generally lower than those of credit cards or personal loans, making it a more affordable way to borrow.
One Monthly Payment
Instead of managing multiple loans, you get to take everything in one go and make repayments monthly. This simplifies budgeting and reduces the mental stress of managing different debts.
Increase Home Value
If you use the funds for home upgrades, including repairs and replacements, it will eventually improve the value of your home. This improvement may pay off long-term, especially if you’re planning to sell the house.
The Cons
If something sounds too good to be true, always look at “the bad” part of it. A cash-out refinance may not be desirable for some people due to:
Starting Over
If you’ve already paid 10 years into your 30-year loan, a new refinance means another 30 years of payments. So, while starting a new mortgage with better terms sounds good, it means going back to the start.
Your Home as Collateral
With a cash-out refinance, you’re increasing the amount you owe against your home. If you run into financial trouble in the future, your house will be on the line.
Temptation to Overspend
Having access to a large chunk of cash can be tempting. Without a clear plan, it’s easy to find yourself spending the money on non-essential items that don’t improve your home’s value or your financial health.
