Pros And Cons Of Cash-Out Refinancing Bankrate
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We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money
The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. Weekend Images Inc./Getty Images Written by This article was generated using automation technology and thoroughly edited and fact-checked by an editor on our editorial staff. June 24, 2022 Edited by Bankrate senior editor for mortgages Bill McGuire has been writing and editing for more than four decades at major newspapers, magazines and websites. June 24, 2022 Share
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PREV NEXT The pandemic housing boom means American homeowners are sitting on a huge pile of home equity. Lenders allow you to pull some of that money out of your home through a . In a , you retire your existing mortgage and withdraw a portion of your home's equity in a lump sum. As with any financial decision, a cash-out refi comes with advantages and disadvantages. Cash-out refinance Pros and cons
Pros
Access to a big chunk of cash: The biggest upside of a cash-out refinance is that you get the money you need to upgrade your home or pay down debt by unlocking the equity you already have. Predictable payments: Most borrowers who take cash-out refinances do so with 30-year fixed-rate mortgages. That means you know how much your monthly payments will be. That's not the case with other options for tapping home equity - many home equity lines of credit, for example, carry variable, rather than fixed, rates. Upgrades can boost your home's value: Depending on the type of renovation you fund with your cash-out refi, the improvements could increase the value of your property and further build your equity. Kitchen and bath remodels are especially effective on this front. Potential tax deductions: Renovations can also make a difference when you file your . In general, you can so long as you use the funds to make improvements that add value to the home. Improvements can also increase your tax basis in the house, which will reduce your liability when you sell. Mortgage debt is "good debt": For most consumers, is the cheapest form of money available. Compared to credit cards, personal loans and other types of debt, mortgages offer a combination of low interest rates and favorable terms. Cons
You owe more: With a cash-out refinance, your overall debt load will increase. No matter how close you were to paying off your original mortgage, the extra cash you obtained to pay the contractor is now a bigger financial burden. This also reduces your proceeds if you were to sell. Closing costs: Just as you had to pay on your original mortgage, you're going to need to pay similar expenses when you refinance. Those can be significant - the credit check, appraisal and other costs can add up to 2 percent to 4 percent of the loan amount. You need plenty of equity: Lenders generally require you to maintain at least 20 percent equity in your home (though there are exceptions) after a cash-out refinance, so if you bought recently with a low-down payment loan, you might not qualify. You might be kicking your debt can down the road: Financial experts say tapping home equity to pay for renovations is a wise move. But if you're cashing out to pay off high-interest debt on credit cards, take a long pause. Make sure you've addressed whatever spending issues led you to run up the debt in the first place. Otherwise, you might find yourself in a debt spiral. Unexpected tax implications: With a cash-out refinance, you take on additional mortgage debt, which can increase your tax liability. Be sure to consult with your accountant. When cash-out refinancing isn t worth it
If you're concerned about the impact of cash-out refinancing on your long-term financial health, think about your future plans. If you expect to sell your home in the near future, for example, it might not make sense to refinance for a cash-out loan. After all, you'll have to repay the larger balance at closing. This is something of a gray area, though. If your kitchen is decorated in 1970s-vintage Formica counters, vinyl flooring and wallpaper, then maybe using the cash-out proceeds to update will boost your home's value enough to recoup the costs. Bottom line
A cash-out refinance can be a smart way to pay for home improvements and renovations, but you have to have adequate equity in your home, and ideally, get the lowest possible rate. Lightbulb Bankrate Insight Before you start , make sure you know where you stand financially. You can use to have a solid grasp on how much you owe on your existing mortgage. Then, you can add up the projected costs of your home renovation to see how much you need to turn your current home into your dream home. Written by Bankrate This article was generated using automation technology and thoroughly edited and fact-checked by an editor on our editorial staff. Edited by up next Part of Mortgages Your level of equity matters. Jun. 22, 2022 Mortgages Cash-out refinances have implications at tax time. Sep. 26, 2022 Mortgages The cash you’ll get isn’t free money. Here’s what to know. May. 19, 2022 Nov. 13, 2022