Are you interested in a refinance with cash out option? In simple terms, this is a mortgage refinance tool that involves more than you currently owe and that allows you to keep the difference.
Is refinance with cash out the right option for you? Examining the cash out refinance rules, the pros and the cons will make it much easier to answer the question.
Cash out refinancing can be explained with one simple example. Imagine that you owe 100,000 dollars on your mortgage. You need an additional 20,000 dollars. The mortgage can be refinanced for 120,000 dollars, which gives you the amount you desire in cash.
This type of refinancing is not a home equity loan. An equity loan comes on top of your mortgage. The cash out refinance possibility is a replacement for the mortgage. Usually, cash out refinance comes with more affordable interest rates than equity loans, as well.
Now that the cash out refinance rules are out of the way, it’s important to examine the benefits of the financial tool.
Obviously, cash out refinance pays out the difference that’s left on your mortgage and it gives you a cash sum. The amount provided in cash can be used on anything that you deem appropriate. Whether you spend the money on home upgrades or your kid’s education is entirely up to you.
As already mentioned, cash out refinance loans usually are provided with favorable interest rates. Depending on the year during which you took the mortgage, cash out refinance could provide a much more financially-sound option.
Choosing refinance with cash out allows for effortless debt consolidation. It’s also a wonderful tool you can use to build your credit score.
Finally, cash out refinance payments are tax deductible. Depending on the option you’ve chosen, cash out refinance could potentially increase your tax refund.
While all of this sounds great, you also need to examine the shortcomings before opting for the financial tool.
Refinance with cash out comes with foreclosure risks. The property itself is used as the collateral. If you can’t make all of the payment, you’re at a risk of losing your house. The very same applies to a mortgage, thus the con is far from unexpected.
Keep in mind that cash-out refinance does come with closing costs. These typically range between three and six percent of the mortgage value. It’s important to do the math in advance. Make sure you’ll be saving more than the money you’ll have the spend with cash out refinancing.
Finally, you will be forced to pay a private mortgage insurance if you’re refinancing more than 80 percent of the mortgage. Private mortgage insurance is once again a percentage – anywhere between 0.05 and one percent of the loan amount on an annual basis.
Understanding the pros and the cons is crucial prior to deciding whether cash out refinance is the right option for you. Do the math and make sure that you know what the worst-case scenario looks like. Equipped with this information, you can make the most rational decision about your financial future.