Pros and cons of cashout refinance
Before you decide to go through with a cash out refinance , it ’ s important to consider the pros and cons of of refinancing . Some of the advantages include :
• You can lower your rate : This is the most common reason most borrowers refinance , and it makes sense for cashout refinancing as well because you want to pay as little interest as possible when taking on a larger loan .
• Your cost to borrow could be lower : Cashout refinancing is often a less expensive form of financing because mortgage refinance rates are typically lower than rates on personal loans ( like a home improvement loan ) or credit cards . Even with closing costs , this can be especially advantageous when you need a significant amount of money .
• You can improve your credit : If you do a cashout refinance and use the funds to pay off debt , you could see a boost to your credit score if your credit utilization ratio drops . Credit utilization , or how much you ’ re borrowing compared to what ’ s available to you , is a critical factor in your score .
• You can take advantage of tax deductions : If you plan to use the funds for home improvements and the project meets IRS eligibility requirements , you could take advantage of the interest deduction at tax time .
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Some of the drawbacks of cash-out refinances :
• Your rate might go up : A general rule of thumb is to refinance to improve your financial situation and get a lower rate . If cashout refinancing increases your rate , it ’ s probably not a smart move .
• You might need to pay PMI : Some lenders let you withdraw up to 90 percent of your home ’ s equity , but doing so might mean paying for private mortgage insurance , or PMI , until you ’ re back below the 80 percent equity threshold . That can add to your overall borrowing costs .
• You could be making payments for decades : If you ’ re using a cashout refinance to consolidate debt , make sure you ’ re not prolonging debt repayment over decades when you could have paid it off much sooner and at a lower total cost otherwise . “ Keep in mind that the repayment on whatever cash you take out is being spread over 30 years , so paying off highercost credit card debt with a cashout refinance may not yield the savings you ’ re thinking ,” McBride says . “ Using the cash out for home improvements is a more prudent use .”
• You have a greater risk of losing your home : No matter how you use a cashout refinance , failing to repay the loan means you could wind up losing it to
foreclosure . Don ’ t take out more cash than you absolutely need , and ensure you ’ re using it for a purpose that will ultimately improve your finances instead of worsening your situation .
• You might be tempted to use your home as a piggy bank : Tapping your home ’ s equity to pay for things like vacations indicates a lack of discipline with your spending . If you ’ re struggling with getting your debt or spending habits under control , consider seeking help through a nonprofit credit counseling agency .
Image by mohamed Hassan from Pixabay
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