A Cash-out Refinance is when a homeowner decides to take some of the equity out of their house in exchange for cash that can be used in any way he or she would like. There may be good reasons for considering a cash-out refinance but it is also wise to know the way they work to be aware of the impact a cash-out refinance may have on your mortgage.
Wise Financial Reasons for a Cash-out Refinance
The best financial reasons taking cash out of your house involve investing that money elsewhere where you may get a higher return on investment. This may involve taking the funds and investing them in the stock market, bond market, or possibly investing in a new start-up company on the ground floor. It may also be wise if you plan on using this money to invest in repairs to the home itself. Similarly, it’s common for people to take cash out of their primary home and use that money for down payment and closing costs on an income property that allows them to increase their monthly income through the rents they receive.
Financial Emergencies
Additionally, a cash-out refinance can help people who need a large amount of money within a relatively short amount of time. These may involve situations where bills may be headed to collections and a homeowner’s credit will be negatively impacted. This may be due to divorce, serious injury or illness, or to pay funeral expenses for someone who does not have life insurance. If other avenues of payment have failed, a cash-out refinance may be worth considering.
Personal Reasons for a Cash-out Refinance
People also may choose to take equity out of their home to give money toward a loved one for some purpose. Commonly this is to assist adult children by gifting down payment money for their own home or helping pay for a college education.
Other reasons may simply be for personal enjoyment. Many people have chosen to take equity out of their homes to pay for a car, boat, or other vehicle or to pay for their dream vacation.
Things to be Aware of with a Cash-out Refinance
When getting a cash-out refinance, note that this cannot be done through a USDA loan and it is usually advisable to do so as a VA loan (if eligible) or as a conventional loan. Additionally, the interest rates tend to be higher for these mortgages than for traditional purchases or a rate-term refinance. There are also minimum amounts of equity that must be left in the property as well, so the amount you take out of a property may not be as much as you would hope. Finally, the new mortgage starts the term over, so choosing to refinance may end up costing you more money over the long term since most of your early mortgage payments will be going to interest rather than the principal balance.