Advantages And Disadvantages Of Cash-Out Refinancing

When it comes to getting a lot of money, there’s the Texas cash-out refinancing to consider especially with its attractive interest rates. When you have a small amount in your liquid cash, but still have lots equity in your house, a cash-out refinancing may provide you with some money especially in times of need such as educational needs, home improvements and some other goals.

But, do keep in mind that cash-out refinancing can be a bit risky as a strategy. It is essential to know its pros and cons, so you know if you want to look for other options before going all in with cash-out refinancing.

So how does cash-out refinancing work?

Cash-out refinance is when you replace an already existing home loan with a more extensive and new loan using refinancing. The lender can provide you a certain amount of money by borrowing more than what you owe. You can use this cash for anything that you want. Often, the money will come in the form of either a bank wire transfer or a kind of a check.

Also Read: A Guide to Mortgage Refinancing and Its Benefits

Advantages and Disadvantages of Cash-Out Refinancing

It can be pretty appealing to do a cash-out, especially when you get the chance to improve your already existing loan with a lower interest rate compared to what you already have.

Here are the pros and cons of cash-out refinancing.

Advantages

These are the pros of doing a cash-out refinancing.

Large loans

Your home’s equity can go as big as tens or even thousands of dollars so if you are looking for a large loan. This is one of the easiest ways to gain a significant amount of money.

Relatively low rates

Since you are using your house to secure your loan, you can enjoy relatively low-interest rates in comparison to personal loans and credit cards.

Potential tax benefits

Unlike years ago, tax benefits nowadays aren’t that generous. However, if you are going to use the funds for your home’s “substantial improvements,” you may have a tax break which can help decrease your loan’s cost. For this, it is best to ask your accountant the full details.

Long repayment period

Replace your already existing mortgage with a new 15-year loan or a 20-year loan and stretch out your payments. However, this may come at a cost.

Disadvantages

Here are some of the cash-out refinancing disadvantages.

Interest costs

Since you are going to restart your housing debt clock, you will have to increase the lifetime interest costs. Borrowing also results to this. You can use amortization tables for your new and existing loan to see how doing a cash-out refinancing might affect you.

Risk of foreclosure

If you cannot repay your loan, there is a high chance that you might lose your house. Loans that are unsecured are way less risky.

Closing costs

Lastly, the mortgage loans will require you up-front closing costs. When you take a higher rate, write a check or roll costs into your loan balance, you are paying those costs. If you want to close your loan, you need to spend around hundreds to several thousand dollars. Add this amount to what you are planning on spending your money on.