When Does Cash-Out Refinancing Make Sense?

cash-out refinance

Cash-out refinancing is a good option for you if you want a lump sum of money financed at a relatively low-interest rate. You’ll probably qualify for this type of refinancing if you have already paid off a significant portion of your mortgage.

For instance, if you still owed $50,000 on a home that’s worth $150,000, you could ask the bank to refinance $70,000. They’d pay off the $50,000 left and give you a check for $20,000, then you’re responsible for paying off the $70,000 mortgage according to the terms. This is a great deal when you need money, but it isn’t the right move for everyone.

Lower Interest Rates

Cash-out financing makes sense if you can get lower interest rates. When you get a quote from the bank, compare this offer to the current rate on your mortgage as well as the rate you’d receive if you were to finance the extra money a different way, such as with credit cards or a home equity loan. If the rate is higher, though, you’ll end up paying more money in the end.

Lower Payments, Longer Term

When you refinance your mortgage, you can sometimes lower your monthly payment, which is a good move for those who are feeling a financial pinch. The lump sum you receive can pay off debt so that you only have to focus your efforts on the new mortgage. However, you’re also taking on a new 15- or 30-year mortgage. If you have 10 years or less on your original mortgage, the refinance isn’t worth it, since a larger percentage of your current payment is going toward the principal balance. Taking on a new mortgage is like starting over.

Other Things to Note

When you refinance your mortgage, you’ll have to pay closing costs. This can put a dent in the money you were hoping to receive. Home equity loans don’t have these charges. You should also pay attention to whether you’re getting a fixed or adjustable rate mortgage, as this affects how much your monthly payment is over time.

Preparing to Apply

Ultimately, cash-out refinancing makes sense for some people, while others might benefit from a home equity loan instead. A qualified loan adviser can take a look at your personal situation to help you decide which method is right for you. Gather up your financial documents like tax returns and pay stubs and contact us to speak with a loan adviser.