Is Cash-Out Refinancing Right For You?

By Stephanie Cochard

If you’re a homeowner and in the market for something that requires a large amount of cash, you might be looking for ways to tap into your home equity. And while sipping a cup of coffee and doing a little research, you might have stumbled upon the term “Cash-Out Refinancing.” Then while adding a splash of cream, you ask yourself, “So how does that work?” Sip. And when adding a sprinkle of sugar you wonder, “Is Cash-Out Refinancing something I should explore?” Sip. Refill. Repeat.

Cash-Out Refinancing can be an attractive option for homeowners looking to aggregate funds in a timely manner. But before taking action, be sure to put on a fresh pot of coffee and consider all the facts.  

What does “Cash-Out Refinancing” mean, exactly?

With Cash-Out Refinancing, you replace your current mortgage and receive a lump sum of funds when you close. The loan proceeds are first used to pay off your existing mortgage(s), including closing costs and pre-paids, and any remaining funds are yours to use. This excess is usually given to the borrower in cash.  

Why do people pull cash out of their homes?

In the case of Cash-Out Refinancing, the funds can be used for anything you want, from home improvements to vacations. The choice is yours. Some use this option to increase the value of their home through renovations or additions. Others use the funds for investments, second property purchases, vacations, emergency funds, or paying off higher interest-rate debt.  

What are the important points to know when considering this option?

Like with anything, there are light and dark roasts to every bean and two sides to every coin. Take a look at the benefits and considerations:

Benefits:

• Can typically offer a lower interest rate than a standard home equity loan.
• Available on either a fixed-rate or an adjustable-rate mortgage.
• May be used on a lower term mortgage, which may end up shortening your overall term from your existing mortgage.
• Freedom to use the funds as you desire.

Considerations:

• You could incur closing costs similar to your original mortgage, which can be thousands of dollars.
• You could be paying interest costs over the long-term, maybe even for decades.
• The size of your mortgage, your mortgage payment, and interest rates may rise.

Do you want to pay off your dream vacation for 30 years?

Likely the most significant question to ask yourself before signing on the dotted line is: What are the funds going to be used for? 

Specifically, is the cash for a short-term or a long-term purpose? Think of it like this: you receive cash up-front, but you end up paying it off over the longer-term. That means, if you use the cash to take your dream European vacation to sip espresso like a local, you could be paying off that week-long trip for over 30 years.

Do you want to continue paying it off long after the coffee has cooled? Maybe not. Consider your individual financial situation, your reason for the funds, and recruit a professional to help you weigh your options. Chances are they’ll have coffee and can help talk you through it.