A cash-out refinance is one of the popular ways to consolidate debt or to get cash for home renovations. Cash-out refinancing provides a significant amount of money at attractive interest rates. By borrowing more than you currently owe, the lender provides cash that you can use for anything you want. There are different pros and cons of cash-out refinancing that need to be considered before taking the mortgage loan. Some pros and cons of cash-out refinance are as below.
Pros of cash-out refinancing
- Lower interest rates
A mortgage refinance offers a lower interest rate compared to credit cards and personal loans. A cash-out refinance might give you a lower interest rate if you originally bought your home when mortgage rates were much higher.
- Large loans
Cash-out refinance is an easy route to a significant amount of money as the equity in your home can amount to tens or hundreds of thousands of dollars.
- Debt consolidation
The money from a cash-out refinance can be used to pay off high-interest credit cards so that you can save thousands of dollars in interest.
- Higher credit score
By paying off your credit cards in full with a cash-out refinance can improve your credit score by reducing your credit utilization ratio.
- Tax deductions
A cash-out refinance can reduce your taxable income and land you a bigger tax refund unlike the credit card or personal loans.
Also Read: Pros and Cons of Refinancing a Home
Cons of cash-out refinancing
- Enabling bad habits
In case you are taking a cash-out refinance the, use it to pay off credit card debt so that you can free up your credit limit. Avoid falling back into bad habits and running up your cards again.
- Closing costs
You will have to pay closing costs for a cash-out refinance like any other refinance. Closing costs are typically 3% to 6% of the loan. Make sure your potential savings are worth the cost.
- New terms
The mortgage you take may have different terms and conditions than previous loan. Double check your interest rate and fees before you agree to the new terms.
- Risk of foreclosure
In case you are not able to repay your loan then you may tend to lose your home. Unsecured loans are far less risky.
Hence, these are few of the pros and cons of cash-out refinancing. Be wise to know your necessity and cause for refinancing so that you don’t make it habitual.