Cash-Out Refinance Pros and Cons
When homeowners refinance their mortgage loans, they are generally looking for one of two benefits: a better interest rate and lower monthly payments, or a large sum of cash in hand. For those needing an influx of cold, hard currency, a cash-out refinance is the optimal tool.
A cash-out refi essentially allows a consumer to tap into the equity in their home. Their mortgage loan gets refinanced to add the amount of cash they’re taking out, so the balance and monthly payments will be higher, but they have money available to, say, make home improvements, pay medical bills or erase a large credit card debt. It can be a useful option but, like any loan, a cash-out refinance has both pros and cons. Read on to learn more.
A lower interest rate. Like most any refinance, the new mortgage loan is likely to come with a lower interest rate, even if the balance is larger.
A reduction in taxable income. Mortgage interest payments are tax deductible, so a larger mortgage balance means more interest paid – and more deductions come tax time.
A debt consolidation tool. If a consumer uses a cash-out refinance to pay off high-interest debts like credit cards, they are likely to save thousands of dollars in debt-related interest payments.
More closing costs. Just as with the original home loan, a cash-out consumer will have to pay closing costs on the new mortgage, which could run from $6,000-$10,000 in many markets.
Greater foreclosure risk. A higher loan balance means higher monthly payments, which lead to an increased risk of the home owner being unable to pay the lender.
Added PMI. If the cash-out amount is for more than 80 percent of the home’s value, the homeowner will be required to pay Private Mortgage Insurance on top of the monthly loan amount.
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