- Cash-out refinance converts some of your home equity into cash that you can use. If you have a high-interest debt, you can pay it off with a cash-out refinance. This improves your credit, and allows you to take advantage of a lower interest rate. Generally, a cash-out refinance has a lower interest rate compared to other loans, such as home equity loans and home improvement loans. You may also save some money from the preferential tax treatment of mortgage interest.
- You may have to pay hundreds or thousands of dollars in closing costs. The amount you have to pay depends on your credit and home equity. If you have good credit and high equity on the property, you may only have to pay low fees. If you borrow more than 80 percent of the home's value, you may have to pay for mortgage insurance. You can often add these fees to the mortgage balance to avoid paying them upfront.
- With a cash-out refinance, you increase the amount of money you owe on your mortgage. This increases the risk of your mortgage becoming underwater, which happens when you owe more than your house is worth. For example, if you have a home worth $200,000 and home equity of $100,000, your home value has to fall by more than $100,000 for your mortgage to be underwater. If you refinance the loan and take out $50,000, your mortgage balance becomes $150,000 and a drop of $50,000 in home value will place your mortgage underwater. An underwater mortgage is difficult to refinance and sell.
- A cash-out refinance increases your loan balance, often resulting in you having to pay off the loan over a longer period of time. If you almost finish paying off your mortgage, Bankrate recommends that you stick with your current mortgage instead. Refinancing can increase your loan repayment term by 15 or 30 years, depending on your mortgage terms.
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