Weighing the Pros and Cons of a Cash-Out Refinance

Is a cash-out refinance right for me?

If your cash flow is low, but your home equity is high, you might be an ideal candidate for a cash-out refinance. This type of loan is different from a traditional refinance because it allows you to borrow more than you currently owe, and pocket the difference versus just breaking even with the bank.

That might sound ideal, but before you decide if a cash-out refi is right for your family, weigh the pros and cons to determine if that’s the right next step for your financial plan.

The upside of cash-out refinance

PRO

Debt Consolidation: Credit card and car loans often come with high interest rates and large monthly payments. A cash-out refinance can wrap all those expenses into one payment at a considerably lower interest rate. As a bonus, paying things off early and having fewer accounts open can also raise your credit score.

PRO

Lower Rates: It’s a great time to crunch some numbers as current interest rates are historically low. While this would lower your monthly payment in a traditional refinance, in a cash-out refinance, it’s a good possibility you could keep your current monthly payment, and the cash from the equity your home has accumulated.

PRO

Larger Loans: Depending on how much equity you have in your house from paying down the balance, making home improvements that add value, or an increase in property values, you could be looking at a 5-didgit difference in between what you owe and what you need to borrow. This can result in a significant amount of money to help pay off debt, make repairs, or help get through a tight patch.

The downside of cash-out refinance

CON

Interest Accrual: Starting over with a lower rate may sound good, but it also means you are starting over from the beginning of the loan. Starting over with a new loan term can increase your lifetime interest costs. Checking amortization tables on your existing loan verses the new loan will help you decide if getting some more money now will be worth it in the long term.

CON

New Loan Term: This is only a “con” in specific scenarios. For example, if you are approaching retirement and plan to live a mortgage-free lifestyle, your loan term would start over from scratch and make that goal harder to achieve.

CON

Closing Costs: Don’t forget the fees associated with refinancing when you’re adding everything up. Closing costs are required with every refinance and range from 2%-5% of the mortgage. On a $200,000 mortgage, that’s a possible one-time expense of $4,000 to $10,000.

What’s best for you?

It depends! A cash-out refinance is a great option to consider after meeting with a loan officer. After assesing your financial goals, our experts can determine if this is the best move for you. If not, we can suggest alternative options that may be a better fit for your financial situation.

As an OVM client, we’re here to help you. If you have questions about cash-out refinances, our team of experts can help guide you in the right direction. Give us a call or if you’re ready, start your application online now!