Pros and cons of a cash-out refinance
Key takeaways
- A cash-out refinance offers benefits like access to money at potentially a lower interest rate, plus tax deductions if you itemize.
- On the downside, a cash-out refinance increases your debt burden and depletes your equity. It could also mean you’re paying your mortgage for longer.
- If you don’t want to replace your entire mortgage with a new loan, you might also consider using a home equity loan or line of credit (HELOC).
Cash-out refinance pros and cons
As with any financial decision, there are benefits and drawbacks to a cash-out refinance:
Pros
You could access a larger sum
The biggest upside of a cash-out refinance is that you can get a considerable amount of money by unlocking home equity you already have — often much more than you could get with a credit card or personal loan. In fact, if you have a major expense, a cash-out refi might be one of the few ways you’re able to pay for it.
You could lower your interest rate
If mortgage rates are lower now than they were when you first got your mortgage, your new cash-out mortgage could come with a lower interest rate, depending on your credit score and other factors. Even if rates are higher now, you’ll likely still get a lower rate doing a cash-out ref compared to getting a credit card or personal loan.
Your payments won’t change
If you had a fixed-rate mortgage and refinance to a new fixed-rate mortgage, even with cash out, your monthly mortgage payments won’t change. That’s not the case with credit cards and home equity lines of credit (HELOCs), which generally carry variable rates. These predictable payments can make it easier to manage your budget over the long term and eliminate the stress of a fluctuating rate and payment.
You could benefit from tax deductions
If you itemize your tax deductions, you could take advantage of the mortgage interest deduction with the new loan — and potentially even more so if you use the cashed-out funds to buy, build or improve a home.
Cons
You owe more
Because you’re taking out a larger loan amount — the remaining balance on the original mortgage plus cash out — your overall debt load will increase. A larger loan might also increase your monthly payments, depending on what rate you get and whether you refinance to a shorter or longer loan term.
Your home is on the line
As with your original mortgage, your home is the collateral for a cash-out refinance, so if you don’t repay the loan, you could lose your home.
You have to pay closing costs
Just as you paid closing costs on your original mortgage, you’ll pay similar expenses when you refinance. The good news: Refinance fees aren’t nearly as expensive as the closing costs on a home purchase. However, they’re usually costlier than the fees associated with a HELOC or home equity loan.
You might be kicking your debt down the road
If you’re cashing out to pay off high-interest debt, 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 spiral and ultimately end up worse off than before.
Should I get a cash-out refinance?
A cash-out refinance could be ideal if you qualify for a better interest rate than you currently have and plan to use the funds to improve your finances or your property. This could include upgrading your home to boost its value or consolidating high-interest debt to free up room in your budget.
If you can’t get a lower interest rate, however, a cash-out refinance might not be the best move, especially if you refinance to a new 30-year loan.
In addition, if you expect to sell your home in the short term, it might not make sense to do a cash-out refinance; you’ll have to repay the larger balance at closing.
Alternatives to a cash-out refinance
Aside from a cash-out refinance, there are other options that allow you to borrow against your home’s equity, including:
- HELOC: A home equity line of credit (HELOC) is a revolving credit line that functions much like a credit card. With a HELOC, you can borrow what you need, repay the amount borrowed and then borrow again. HELOCs come with a specific draw period during which you can continue to borrow fuwhat is wnds as needed. Once the draw period closes, you pay back the remaining balance in installments.
- Home equity loan: Home equity loans provide a lump sum payment similar to a cash-out refinance. You pay back the funds in installments, usually at a fixed interest rate that’s lower than many other types of consumer lending options.
Both options are often quicker and less expensive to get than a cash-out refi. However, they also use your home as collateral and could come with higher interest rates compared to refinancing.
