The article concerns the following question – Should you use Cash-Out Refinancing? Cash-out refinancing sounds like a great idea on the surface. You need or want some cash and the funds are readily available in your equity. Since you have already saved that money over the years, why should you not use it? But is that really the most logical thinking process? Should you use cash-out refinancing to access the equity in your home? Is your equity really a savings account?
Certainly, reviewing both sides of this argument, there are pros and cons to using one’s home equity when looking for available cash. Listed below are the advantages and disadvantages of using cash-out refinancing.
Benefits of Cash-out Refinancing:
- If you find yourself with excessive debt, there is no doubt that credit card debt will be involved. At eighteen percent for general cards and twenty-eight percent for department store cards, the burden of debt can be heavy. And, the sad reality is nothing is really being paid because the monthly payments are strictly interest. But if you can remortgage your home and pay off the credit cards, you can significantly reduce your monthly expenses. In addition, if you can afford to keep making the same payment amount, you will actually be in a more positive position because you are paying down more principal than interest since your refinance is at a lower rate. In some cases, refinance can be a way out of debt.
- Assuming you are retired and have a pension, you might decide to use the equity in your home to travel. You know the monthly payments are covered because your pension check arrives each month on time. As long as you have no wish to leave a paid-off home to heirs in your will, then you can safely use a small amount of the equity to follow your dreams.
- Often, by taking cash out of your equity, you save interest as opposed to asking the bank for a personal loan. Because the lender has the house as security, there is a greater acceptance to loaning money than in the situation with personal loans. And mortgages tend to have lower interest rates so it makes sense for you to use cash-out refinancing. This would be particularly true in the case where you wanted to start a new business. The bank might deem your venture as too risky for a personal or business loan. Plus, by asking for a loan for a start-up, the bank is going to demand projected Profit and Loss Statements, a business plan, and many other documents. Your cash-out refinancing, however, can be used for almost anything with many lenders.
- Investments are another reason for cash-out financing. If you find that you can use your equity cheaper than the rate you would receive for an investment, it might be a good idea to profit from the differential in the interest.
Disadvantages of Cash-out Refinancing:
- The biggest drawback of using cash-out financing, and the most important point to remember is that anytime you take out a mortgage, no matter how small, you have put your home on the line. You are always at risk of losing something that is probably most precious to you and your family.
- While most people have good intentions when paying off credit card, statistics show that few people actually follow their plans and their budgets. Whether slowly or immediately, they fall back into their old ways of living and ultimately place themselves in a bigger mess because they have refinanced their mortgage, used the cash-out money, and either kept the old credit card balances or rung up new debt with the paid-off cards. The new-found cash is a trap for many people.
- Usually a mortgage for investment purposes only makes sense if the amount funded is paid off in the same time period as the investment earnings. That is to say, if you take thirty years to pay the mortgaged amount, yet the investment was only for three years, you have spent considerable amounts of money over the lifetime of that mortgage. And do not forget that the interest is not the real rate. Whatever it costs you to refinance must be factored in to get the true picture. In most instances, you do not profit at all.
- Using the equity in your retirement years is only sound if you have guaranteed monthly income until your death, and you have made arrangements for any disability or illness. Without any type of backing in the case of medical issues, you could lose your home when you need it most.
Without doubt, the question regarding the use of cash-out refinancing is tricky at best. By agreeing to a cash-out, you are effectively impacting your future and can either benefit by sticking to your goals and plans, or fail because you have not been dedicated or strict enough with your spending.